Internal Revenue Bulletin: 2014-9

February 24, 2014


Highlights of This Issue

 

These synopses are intended only as aids to the reader in identifying the subject matter covered. They may not be relied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2014–7 Rev. Rul. 2014–7

This revenue ruling provides guidance on the amount of the life insurance reserves taken into account under § 807 of the Internal Revenue Code for a variable contract where some or all of the reserves are accounted for as part of a life insurance company's separate account reserves. Rev. Rul. 2007–54 is modified and superseded and Rev. Rul. 2007–61 is obsoleted.

T.D. 9655 T.D. 9655

TD 9655 includes final Treasury regulations providing guidance under section 4980H of the Internal Revenue Code, as added by the Patient Protection and Affordable Care Act. Section 4980H generally provides that an applicable large employer may be subject to an assessable payment if the employer does not offer minimum essential health coverage to its full-time employees (and their dependents), or if the employer offers its full-time employees (and their dependents) minimum essential health coverage that is not affordable. The regulations affect applicable large employers, defined under section 4980H as employers that employed on average at least 50 full-time employees (including full-time equivalents) on business days during the preceding calendar year.

Notice 2014–10 Notice 2014–10

Notice 2014–10 provides relief from the individual shared responsibility payment required under section 5000A of the Internal Revenue Code for months in 2014 in which individuals have, under Medicaid and chapter 55 of Title 10, U.S.C., limited-benefit health coverage that is not minimum essential coverage.

Notice 2014–12 Notice 2014–12

Resident populations of the 50 states, the District of Columbia, Puerto Rico, and the insular areas for purposes of determining the 2014 calendar year (1) state housing credit ceiling under section 42(h) of the Code, (2) private activity bond volume cap under section 146, and (3) private activity bond volume limit under section 142(k) are reproduced.

Rev. Proc. 2014–16 Rev. Proc. 2014–16

Rev. Proc. 2014–16 provides the procedures by which a taxpayer may obtain the automatic consent of the Commissioner of Internal Revenue to change to certain methods of accounting for amounts paid to acquire, produce, or improve tangible property, as well as to change to a reasonable method described in § 1.126A–1(f)(4) for self-constructed assets. The revenue procedure also provides the procedures for changing to a permissible method of accounting under section 263A(b)(2) and § 1.263–3(a)(1) for certain costs related to real property acquired through foreclosure or another similar transaction. Finally, the revenue procedure modifies section 3.09 of the APPENDIX to Rev. Proc. 2011–14 regarding a change to the method of accounting described in Rev. Proc. 2011–43 for taxpayers in the business of transporting, delivering, or selling electricity.

Rev. Proc. 2014–20 Rev. Proc. 2014–20

This revenue procedure provides a safe harbor under which the Internal Revenue Service will, under certain, defined circumstances, treat indebtedness that is secured by 100 percent of the ownership interest in a disregarded entity that holds real property as indebtedness that is secured by real property for purposes of § 108(c)(3)(A) of the Internal Revenue Code. This revenue procedure will assist taxpayers with so-called “mezzanine” financing in workouts and similar circumstances.

Preface

The IRS Mission

Provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code. This part includes rulings and decisions based on provisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation. This part is divided into two subparts as follows: Subpart A, Tax Conventions and Other Related Items, and Subpart B, Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous. To the extent practicable, pertinent cross references to these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the Treasury’s Office of the Assistant Secretary (Enforcement).

Part IV.—Items of General Interest. This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index for the matters published during the preceding months. These monthly indexes are cumulated on a semiannual basis, and are published in the last Bulletin of each semiannual period.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Rev. Rul. 2014–7

ISSUE

What is the amount of the life insurance reserves taken into account under section 807 of the Internal Revenue Code for a variable contract where some or all of the reserves are accounted for as part of a life insurance company’s separate account reserves?

FACTS

Situation 1. IC is a life insurance company as defined in section 816(a) and is the issuer of Contract A. Contract A provides for the payment of variable annuity benefits computed on the basis of a recognized mortality table and the investment experience of IC’s segregated asset account (separate account). IC bears the mortality risks with regard to the contingencies involved in the variable annuity benefits. Contract A neither provides any “supplemental benefits” (as defined in section 807(e)(3)(D)) nor involves any “qualified substandard risks” (as defined in section 807(e)(5)(B)).

Contract A is a “variable contract” as defined in section 817(d) and an “annuity contract” under section 817(g). IC’s reserves for Contract A are “life insurance reserves” as defined in section 816(b).

For taxable years 2012 and 2013, the amounts of end-of-year tax reserves determined under section 807(d)(2) for Contract A are $8,000 and $10,000, respectively.

The 2012 and 2013 end-of-year net surrender values determined under section 807(e)(1) for Contract A are $7,840 and $9,830, respectively. The amounts taken into account by IC with regard to Contract A in determining its 2012 and 2013 end-of-year statutory reserves within the meaning of section 807(d)(6) are $8,050 and $10,045, respectively. None of IC’s statutory reserves is attributable to any deferred or uncollected premium.

Situation 2. The facts are the same as Situation 1, except that Contract A provides a minimum guaranteed death benefit in addition to variable annuity benefits. IC bears the mortality risks and investment risks with regard to the contingencies involved in the provision of the death benefit.

For taxable years 2012 and 2013, the end-of-year tax reserves determined under section 807(d)(2) for Contract A are $8,155 and $10,165, respectively. The 2012 and 2013 end-of-year net surrender values determined under section 807(e)(1) for Contract A are $8,000 and $10,000, respectively. The amount taken into account by IC with regard to Contract A in determining its 2012 and 2013 end-of-year statutory reserves within the meaning of section 807(d)(6) are $8,210 and $10,215, respectively.

If Contract A had not provided the minimum guaranteed death benefit, the 2012 and 2013 end-of-year tax reserves determined under section 807(d)(2) would have been $8,000 and $10,000, respectively.

LAW AND ANALYSIS

Section 803(a) provides that life insurance company gross income is the sum of (i) premiums, (ii) net decreases in certain reserves under section 807(a), and (iii) other amounts generally included by a taxpayer in gross income. Section 805(a)(2) authorizes a deduction for the net increase in certain reserves under section 807(b). In calculating the change in reserves for a variable contract, the increase or decrease in the reserves due to appreciation and depreciation of separate account assets is removed. See section 817(a).

Section 807(c) sets forth the items taken into account in determining the net decrease or net increase in reserves under section 807(a) and (b). Among the items taken into account are “life insurance reserves” (as defined in section 816(b)).

For purposes of determining a life insurance company’s income or deduction from a change in reserves, section 807(d)(1) provides that the amount of the life insurance reserves for any contract is the greater of— (i) the contract’s net surrender value, or (ii) the contract’s tax reserve determined under section 807(d)(2). However, the life insurance reserves for a contract cannot exceed the “statutory reserves” (as defined in section 807(d)(6)).

Section 807(d)(2) provides that the amount of the tax reserve for any contract is determined using— (i) the tax reserve method applicable to the contract, (ii) the greater of the applicable Federal interest rate or the prevailing State assumed interest rate, and (iii) the prevailing commissioners’ standard tables for mortality and morbidity adjusted as appropriate to reflect the risks (such as substandard risks) incurred under the contract which are not otherwise taken into account. The tax reserves determined under section 807(d)(2) reflect all of the benefits (including the net surrender value) payable under the contract.

Section 807(e)(1) provides generally that the net surrender value of “any contract” is determined with regard to any penalty or charge that would be imposed on surrender, but without regard to any market value adjustment on surrender. The net surrender value represents the current contractual cash benefit payable under a contract.

Except as otherwise provided in special rules under section 807(e)(3) and (5) (relating to qualified supplemental benefits and qualified substandard risks), the comparison of the tax reserve and the net surrender value is made on an aggregate benefit basis. See H. Rep. No. 432, Pt. 2, 98th Cong., 2d Sess. 1414 (1984); S. Prt. 169, Vol. I, 98th Cong. 2d Sess. 540 (1984).

Section 807 makes no distinction between a fixed (non-variable) contract and a variable contract. For both fixed and variable contracts, a life insurance company determines its income or deduction from a change in reserves using the amounts of its life insurance reserves determined under section 807. See also section 817(a) (referring to “the sum of the items described in section 807(c)”).

Section 817(c) requires a life insurance company to account separately for the income, exclusion, deduction, asset, reserve, and other liability items attributable to variable contracts. If a variable contract contains a guarantee (for example, a minimum death benefit), section 817(d) (flush language) requires an insurance company to account for the excess of obligations under the guarantee over the obligations under the contract without regard to the guarantee as part of the company’s general account, and not as part of the company’s separate account.

In both Situation 1 and Situation 2, the end-of-year tax reserves determined under section 807(d)(2) for Contract A— (i) exceed the end-of-year net surrender value of the Contract, but (ii) are less than the end-of-year statutory reserves for the Contract. Accordingly, under section 807(d)(1), the amount of the end-of-year life insurance reserves taken into account under section 807 for Contract A in both Situations is the amount of the end-of-year tax reserves determined under section 807(d)(2). In Situation 1, the amounts of the 2012 and 2013 end-of-year life insurance reserves for Contract A are $8,000 and $10,000, respectively. In Situation 2, the amounts of the 2012 and 2013 end-of-year life insurance reserves for Contract A are $8,155 and $10,165, respectively.

In Situation 2, IC is required under section 817(d) to account for the excess of its obligations under Contract A with the minimum death benefit over its obligations under the Contract without the death benefit as part of the company’s general account reserves. Pursuant to section 817(c), IC accounts for its remaining obligations under the Contract A as part of the company’s separate account reserves. Accordingly, for end-of-year 2012, IC accounts for the $155 excess of its obligations under Contract A with the minimum death benefit ($8,155) over its obligations under the Contract without the death benefit ($8,000) as part of the company’s general account reserves. IC accounts for the remaining $8,000 as part of its separate account reserves. For end-of-year 2013, IC accounts for the $165 excess of its obligations under Contract A with the minimum death benefit ($10,165) over its obligations under Contract A without the death benefit ($10,000) as part of the company’s general account reserves. IC accounts for the remaining $10,000 as part of its separate account reserves.

This revenue ruling provides guidance only with regard to the determination under section 807(d) of the amount of the life insurance reserves for a variable contract when some or all of the reserves are accounted for as part of a life insurance company’s separate account reserves.

HOLDING

Under section 807(d)(1), the amounts of the end-of-year life insurance reserves for Contract A in both Situation 1 and Situation 2 are the amounts of the tax reserve determined under section 807(d)(2). Thus, in Situation 1, the amounts of the 2012 and 2013 end-of-year life insurance reserves for Contract A are $8,000 and $10,000, respectively. In Situation 2, the amounts of the 2012 and 2013 end-of-year life insurance reserves for Contract A are $8,155 and $10,165, respectively.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2007–54 is modified and superseded. Rev. Rul. 2007–61 is obsoleted.

DRAFTING INFORMATION

The principal author of this revenue ruling is David Remus of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Mr. Remus at (202) 317-6995 (not a toll-free number).

TD 9655

Shared Responsibility for Employers Regarding Health Coverage

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1, 54, and 301

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Final regulations.

SUMMARY:

This document contains final regulations providing guidance to employers that are subject to the shared responsibility provisions regarding employee health coverage under section 4980H of the Internal Revenue Code (Code), enacted by the Affordable Care Act. These regulations affect employers referred to as applicable large employers (generally meaning, for each year, employers that had 50 or more full-time employees, including full-time equivalent employees, during the prior year). Generally, under section 4980H an applicable large employer that, for a calendar month, fails to offer to its full-time employees health coverage that is affordable and provides minimum value may be subject to an assessable payment if a full-time employee enrolls for that month in a qualified health plan for which the employee receives a premium tax credit.

DATES:

Effective date: These regulations are effective February 12, 2014.

Applicability Dates: For dates of applicability, see section XVI of this preamble, §§ 54.4980H–1(b), 54.4980H–2(f), 54.4980H–3(i), 54.4980H–4(h), 54.4980H–5(g), and 54.4980H–6(b).

FOR FURTHER INFORMATION CONTACT:

Kathryn Johnson or Shad Fagerland, (202) 317-6846 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Sections I through IV of the preamble (“Background”) describe section 4980H, including previously issued guidance under section 4980H, as well as related statutory provisions. Sections V through XIV of the preamble (“Explanation and Summary of Comments”) describe the comments received on the proposed regulations and explain amendments to the proposed regulations. Section XV of the preamble (“Transition Relief and Interim Guidance”) provides certain transition relief and interim guidance under section 4980H, and section XVI of the preamble provides information on the effective date for and reliance on these final regulations.

I. Shared Responsibility for Employers (Section 4980H)

 

A. In general

Section 4980H was added to the Code by section 1513 of the Patient Protection and Affordable Care Act, Public Law 111–148 (124 Stat. 119 (2010)), was amended by section 10106(e) and (f) of the Patient Protection and Affordable Care Act, was further amended by section 1003 of the Health Care and Education Reconciliation Act of 2010, Public Law 111–152 (124 Stat. 1029 (2010)), and was further amended by the Department of Defense and Full-Year Continuing Appropriations Act, 2011, Public Law 112–10 (125 Stat. 38 (2011)) (collectively, the Affordable Care Act). Section 1513(d) of the Affordable Care Act provides that section 4980H applies to months beginning after December 31, 2013; however, Notice 2013–45 (2013–31 IRB 116), issued on July 9, 2013, provides transition relief for 2014 with respect to section 4980H.

Section 4980H applies only to applicable large employers. An applicable large employer with respect to a calendar year is defined in section 4980H(c)(2) as an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year. For purposes of determining whether an employer is an applicable large employer, full-time equivalent employees (FTEs), as well as full-time employees, are taken into account. As set forth in section 4980H(c)(2)(E), the number of an employer’s FTEs is determined based on the hours of service of employees who are not full-time employees. Under section 4980H(c)(2)(C), the determination of whether an employer that was not in existence in the preceding calendar year is an applicable large employer is based on the average number of employees that it is reasonably expected the employer will employ on business days in the current calendar year.

Section 4980H generally provides that an applicable large employer is subject to an assessable payment if either (1) the employer 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 and any full-time employee is certified to the employer as having received an applicable premium tax credit or cost-sharing reduction (section 4980H(a) liability), or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan and one or more full-time employees is certified to the employer as having received an applicable premium tax credit or cost-sharing reduction (section 4980H(b) liability). Section 4980H(c)(4) provides that a full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

An employer may be liable for an assessable payment under section 4980H(a) or (b) only if one or more full-time employees are certified to the employer as having received an applicable premium tax credit or cost-sharing reduction. The assessable payment under section 4980H(a) is equal to the number of all full-time employees (excluding 30 full-time employees) multiplied by one-twelfth of $2,000 for each calendar month, while the assessable payment under section 4980H(b) is based on the number of full-time employees who are certified to the employer as having received an applicable premium tax credit or cost-sharing reduction with respect to that employee’s purchase of health insurance for the employee on an Affordable Insurance Exchange (Exchange[1]) multiplied by one-twelfth of $3,000 for each calendar month. In no case, however, may the liability under section 4980H(b) exceed the maximum potential liability under section 4980H(a). Generally, liability under section 4980H(b) may arise because, with respect to a full-time employee who has been certified to the employer as having received an applicable premium tax credit or cost-sharing reduction[2], the coverage[3] offered by the employer is not affordable within the meaning of section 36B(c)(2)(C)(i) or does not provide minimum value (MV) within the meaning of section 36B(c)(2)(C)(ii). An employee’s receipt of a premium tax credit under section 36B (premium tax credit) with respect to coverage for a dependent only will not result in liability for the employer under section 4980H.

B. Previously issued guidance

During 2011 and 2012, the Treasury Department and the IRS published four notices, each of which outlined potential approaches to future guidance under section 4980H and requested public comments: (1) Notice 2011–36 (2011–21 IRB 792) (addressed the definition of the terms employer, employee, and hour of service and requested comments on an approach to use an optional look-back measurement method for determining full-time employee status); (2) Notice 2011–73 (2011–40 IRB 474) (requested comments on a health coverage affordability safe harbor for employers under section 4980H using Form W-2 wages); (3) Notice 2012–17 (2012–9 IRB 430) (provided that the look-back measurement method and the Form W-2 affordability safe harbor will be incorporated into upcoming proposed regulations and requested comments on a potential approach for determining the full-time employee status of new employees under section 4980H); and (4) Notice 2012–58 (2012–41 IRB 436) (provided guidance and reliance on approaches for ongoing employees and new employees who are reasonably expected to be full-time employees and requested comments on a revised optional method for determining the full-time employee status for new employees with variable hours and new seasonal employees). Public comments were submitted in response to each of the four notices.

Taking into account all the comments received in response to this series of notices, on December 28, 2012, the Treasury Department and the IRS released a notice of proposed rulemaking (REG–138006–12, 78 FR 218). Written and electronic comments responding to the notice of proposed rulemaking were received. The comments are available for public inspection at www.regulations.gov or upon request. A public hearing was conducted on April 23, 2013. After consideration of all of the comments and testimony, the proposed regulations are adopted as amended by this Treasury decision. The amendments are discussed in this preamble.

After the issuance of the proposed regulations, on July 9, 2013, the Treasury Department and the IRS issued Notice 2013–45, which provides as transition relief that no assessable payments under section 4980H will apply for 2014. Notice 2013–45 also provides transition relief for 2014 for the section 6056 information reporting requirements for applicable large employers and the section 6055 information reporting requirements for providers of MEC.

The preamble to the proposed regulations provides transition relief that allows flexibility for individuals to make changes in salary reduction elections for accident and health plans provided through section 125 cafeteria plans for non-calendar cafeteria plan years beginning in 2013. The scope of this transition relief was clarified in section VI of Notice 2013–71 (2013–47 IRB 532), issued on October 31, 2013.

II. Minimum Essential Coverage, Minimum Value and Affordability (Sections 5000A and 36B)

MEC, MV and affordability are defined under Code provisions other than section 4980H, but all relate to the determination of liability under section 4980H, and accordingly are summarized briefly in this section of the preamble (but are more fully described in other cited guidance). Specifically, for purposes of section 4980H, an employer is not treated as having offered coverage to an employee unless the coverage is MEC. Moreover, under section 36B, an individual who is offered employer coverage but instead purchases coverage under a qualified health plan within the meaning of section 1301(a) of the Affordable Care Act on an Exchange may be eligible for a premium tax credit if the household income of the individual’s family falls within certain thresholds and the coverage offered by the employer either does not provide MV or is not affordable. While an individual may purchase coverage under a qualified health plan on an Exchange without regard to whether the individual is eligible for a premium tax credit, an employer’s potential liability under section 4980H is affected by the individual’s purchase of coverage on an Exchange only if the individual receives a premium tax credit.

A. Minimum essential coverage (MEC)

MEC is defined in section 5000A(f) and the regulations under that section. Section 5000A(f)(1)(B) provides that MEC includes coverage under an eligible employer-sponsored plan. Under section 5000A(f)(2) and § 1.5000A–2(c)(1), an eligible employer-sponsored plan is, with respect to any employee, (1) group health insurance coverage offered by, or on behalf of, an employer to the employee that is either (a) a governmental plan within the meaning of section 2791(d)(8) of the Public Health Service Act (PHS Act) (42 U.S.C. 300gg–91(d)(8)), (b) any other plan or coverage offered in the small or large group market within a State, or (c) a grandfathered health plan, as defined in section 5000A(f)(1)(D), offered in a group market, or (2) a self-insured group health plan under which coverage is offered by, or on behalf of, an employer to the employee. Section 5000A(f)(3) and regulations thereunder provide that MEC does not include coverage consisting solely of excepted benefits described in section 2791(c)(1), (c)(2), (c)(3), or (c)(4) of the PHS Act or regulations issued under these provisions. See § 1.5000A–2(g).

B. Minimum value (MV)

If the coverage offered by an employer fails to provide MV, an employee may be eligible to receive coverage in a qualified health plan supported by the premium tax credit. Under section 36B(c)(2)(C)(ii), a plan fails to provide MV if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of those costs.

Section 1302(d)(2)(C) of the Affordable Care Act provides that, in determining the percentage of the total allowed costs of benefits provided under a group health plan, the regulations promulgated by the Secretary of Health and Human Services (HHS) under section 1302(d)(2) of the Affordable Care Act apply. HHS published final regulations under section 1302(d)(2) of the Affordable Care Act on February 25, 2013 (78 FR 12834). On May 3, 2013, the Treasury Department and the IRS published a notice of proposed rulemaking (REG–125398–12, 78 FR 25909) that adopts the HHS rules and provides additional guidance on MV. The HHS regulations at 45 CFR 156.20 define the percentage of the total allowed costs of benefits provided under a group health plan as (1) the anticipated covered medical spending for essential health benefits (EHB) coverage (as defined in 45 CFR 156.110(a)) paid by a health plan for a standard population, (2) computed in accordance with the plan’s cost sharing, and (3) divided by the total anticipated allowed charges for EHB coverage provided to the standard population. In addition, 45 CFR 156.145(c) provides that the standard population used to compute this percentage for MV (as developed by HHS for this purpose) reflects the population covered by typical self-insured group health plans. The HHS regulations describe several options for determining MV, including the MV Calculator (available at http://cciio.cms.gov/resources/regulations/index.html). Alternatively, a plan may determine MV through one of the safe harbors being established by HHS and the IRS. For plans with nonstandard features that are incompatible with the MV Calculator or a safe harbor, 45 CFR 156.145(a)(3) provides that the plan may determine MV through an actuarial certification from a member of the American Academy of Actuaries after the member performed an analysis in accordance with generally accepted actuarial principles and methodologies. Under proposed § 1.36B–6(f)(4), an actuary performing an actuarial certification for a plan with nonstandard features must use the MV Calculator to determine the plan’s MV for plan coverage the MV calculator measures. The actuary adds to that MV percentage the result of the actuary’s analysis of nonstandard features. Finally, 45 CFR 156.145(a)(4) provides that a plan in the small group market satisfies MV if it meets the requirements for any of the levels of metal coverage defined at 45 CFR 156.140(b) (bronze, silver, gold, or platinum).

C. Affordability

Under section 36B(c)(2)(B) and (C), an employee is not eligible for subsidized coverage for any month in which the employee is offered health coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2)) that provides MV and that is affordable to the employee. Coverage for an employee under an eligible employer-sponsored plan is affordable if the employee’s required contribution (within the meaning of section 5000A(e)(1)(B)) for self-only coverage does not exceed 9.5 percent of the taxpayer’s household income for the taxable year. See section 36B(c)(2)(C)(i) and § 1.36B–1(e).

III. Reporting Requirements for Applicable Large Employers (Section 6056)

Section 6056, enacted by the Affordable Care Act, directs an applicable large employer to file a return with the IRS that reports, for each employee who was a full-time employee for one or more months during the calendar year, certain information described in section 6056(b) about the health care coverage the employer offered to that employee (or, if applicable, that the employer did not offer health care coverage to that employee). Section 6056 also requires applicable large employers to furnish, by January 31 of the calendar year following the calendar year for which the return must be filed, a related statement described in section 6056(c) to each full-time employee for whom information is required to be included on the return. On September 5, 2013, the Treasury Department and the IRS released a notice of proposed rulemaking (REG–136630–12, [78 FR 54996]) providing guidance under section 6056, including a description of and request for comments on certain simplified reporting methods under consideration by the Treasury Department and the IRS.

IV. The 90-Day Limit on Waiting Periods (Public Health Service Act Section 2708)

Section 2708 of the PHS Act[4] provides that, for plan years beginning on or after January 1, 2014, a group health plan or health insurance issuer offering group health insurance coverage may not apply any waiting period that exceeds 90 days. Section 2704(b)(4) of the PHS Act, section 701(b)(4) of ERISA, and section 9801(b)(4) define a waiting period to be the period that must pass with respect to an individual before the individual is eligible to be covered for benefits under the terms of the plan. Section 2708 of the PHS Act does not require the employer to offer coverage to any particular employee or class of employees, but prevents an otherwise eligible employee (or dependent) from waiting more than 90 days before coverage becomes effective.

Notice 2012–59 (2012–41 IRB 443), and parallel guidance issued by the Department of Labor (DOL) and HHS[5], provide temporary guidance on compliance with section 2708 of the PHS Act and provide that this temporary guidance remains in effect at least through the end of 2014.

On March 21, 2013, the Treasury Department, DOL, and HHS (the Departments) issued a notice of proposed rulemaking (REG–122706–12, 78 FR 17313) providing guidance under section 2708 of the PHS Act. In the preamble to the proposed regulations under section 2708 of the PHS Act, the Departments state that, in their view, the proposed regulations are consistent with, and no more restrictive on employers than Notice 2012–59 (and the parallel guidance issued by DOL and HHS) and further state that the Departments will consider compliance with the proposed regulations as compliance with section 2708 of the PHS Act at least through the end of 2014.

Under the section 4980H final regulations, there are times when an employer will not be subject to an assessable payment with respect to an employee although the employer does not offer coverage to that employee during that time. However, the fact that an employer will not owe an assessable payment under section 4980H for failure to offer coverage during certain periods of time does not, by itself, constitute compliance with section 2708 of the PHS Act during that same period.[6]

Explanation and Summary of Comments

 

V. Determination of Status as an Applicable Large Employer

 

A. In general

Section 4980H applies only to employers that are applicable large employers. Section 4980H(c)(2)(A) provides that the term applicable large employer means, with respect to a calendar year, an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year. Section 4980H(c)(2)(E) provides that solely for purposes of determining whether an employer is an applicable large employer, an employer shall, in addition to the number of full-time employees for any month otherwise determined, include for such month a number of employees determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120. For purposes of the proposed regulations and these final regulations, these additions to the number of full-time employees made solely for the determination of status as an applicable large employer are referred to as full-time equivalent employees (FTEs).

An applicable large employer may consist of multiple related entities (such as corporations) due to the application of the aggregation rules. Each such entity is referred to in this preamble and the final regulations as an applicable large employer member.

Commenters requested that the threshold for status as an applicable large employer be increased to various numbers of full-time employees (including FTEs) greater than 50. The final regulations do not adopt this suggestion as a permanent rule because it is inconsistent with the statutory definition of applicable large employer in section 4980H(c)(2). But see section XV.D.6 of this preamble for 2015 transition relief for certain applicable large employers with fewer than 100 full-time employees (including FTEs). Additional comments received on the definition of applicable large employer and modifications to the rules related to the determination of status as an applicable large employer contained in the proposed regulations are described in this section V of the preamble.

B. Rules for employers not in existence in preceding year

Section 4980H(c)(2)(C)(ii) provides that in the case of an employer that was not in existence throughout the preceding calendar year, the determination of whether such employer is an applicable large employer for the current calendar year is based on the average number of employees that it is reasonably expected such employer will employ on business days in the current calendar year.

The final regulations clarify that an employer is treated as not having been in existence throughout the prior calendar year only if the employer was not in existence on any business day in the prior calendar year. For example, if an employer comes into existence on May 1 of Year 1, during Year 1 the employer’s status as an applicable large employer is determined based on the average number of employees that it is reasonably expected such employer will employ on business days in the current calendar year (Year 1). To determine the employer’s status as an applicable large employer for Year 2, the employer’s status as an applicable large employer is determined based on the number of employees that it employed on business days from May 1 through December 31 of Year 1 (rather than relying on the employer’s reasonable expectations).

Commenters requested that an employer not in existence in the prior calendar year be granted a safe harbor under which an employer would not be an applicable large employer until a certain period of time has passed after the employer begins operations or until a certain period of time has passed after a new employer employs at least a specified number of full-time employees. One commenter opposed the adoption of a safe harbor that would delay the applicable large employer determination for new employers. The final regulations do not adopt such a safe harbor.

However, other aspects of section 4980H and the final regulations may address the concern raised by commenters that new employers will have difficulty establishing a group health plan in the first months of operation. In particular, under the final regulations, the determination of whether a new employer is an applicable large employer during its first calendar year is based on the employer’s reasonable expectations at the time the business comes into existence, even if subsequent events cause the actual number of full-time employees (including FTEs) to exceed that reasonable expectation. Section 54.4980H–2(b)(3). Also, for purposes of the liability calculation under section 4980H(a), with respect to a calendar month, the number of full-time employees of an applicable large employer member is reduced by that member’s allocable share of 30. Section 54.4980H–4(e). This reduction could be particularly significant for a new employer with a number of full-time employees that does not exceed 30 by a large number for certain calendar months (and that for some calendar months may be below 30), circumstances which the Treasury Department and the IRS anticipate would characterize many new employers. Also, under the look-back measurement method if an employee is reasonably expected at his or her start date to be a full-time employee (and is not a seasonal employee) and is otherwise eligible for an offer of coverage, an employer that sponsors a group health plan that offers coverage to the employee by the first day of the calendar month immediately following the conclusion of the employee’s initial three full calendar months of employment will not be subject to an assessable payment under section 4980H(a) (and section 4980H(b) if the coverage offered provides MV) for those three calendar months by reason of its failure to offer coverage to the employee for the initial three full calendar months of employment. Section 54.4980H–3(d)(2)(iii). See also § 54.4980H–3(c)(2) for a similar rule under the monthly measurement method that applies based on when an employee first becomes otherwise eligible for an offer of coverage. An employer is also not subject to an assessable payment under section 4980H with respect to an employee for the first calendar month of the employee’s employment if the employee’s start date is other than the first day of the calendar month. See § 54.4980H–4(c) and § 54.4980H–5(c).

C. Seasonal workers

Section 4980H(c)(2)(B) provides that an employer is not considered to employ more than 50 full-time employees if (1) the employer’s workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year, and (2) the employees in excess of 50 employed during such 120-day period are seasonal workers. For this purpose, the proposed regulations define the term seasonal worker as a worker who performs labor or services on a seasonal basis as defined by the Secretary of Labor, including (but not limited to) workers covered by 29 CFR 500.20(s)(1) and retail workers employed exclusively during holiday seasons. The proposed regulations further provide that employers may apply a reasonable, good faith interpretation of the term seasonal worker and a reasonable good faith interpretation of 29 CFR 500.20(s)(1) (including as applied by analogy to workers and employment positions not otherwise covered under 29 CFR 500.20(s)(1)).

Commenters requested that other employees with seasonal employment who are not excluded under the seasonal worker exception nonetheless be excluded for purposes of determining applicable large employer status. However, given the specific statutory reference to seasonal workers as part of a more limited exception, there is no statutory authority for such a broad exclusion. Accordingly, the final regulations adopt the provisions of the proposed regulations with certain clarifications in response to comments.

With respect to the reference to retail workers employed exclusively during the holiday seasons, commenters requested clarification of the specific events or periods of time that would be treated as holiday seasons. The final regulations do not indicate specific holidays or the length of any holiday season for this purpose, as these will differ for different employers. Retail workers employed exclusively during holiday seasons often are seasonal workers and therefore are generally excludible on that basis, if the employer otherwise meets the conditions of the seasonal worker exception.

The proposed regulations apply the seasonal worker exception set forth in section 4980H(c)(2) based on the prior calendar year. One commenter requested that the seasonal worker exception apply to new employers. The final regulations adopt this suggestion, so that in the case of an employer that was not in existence on any business day during the preceding calendar year, the seasonal worker exception applies so that the employer will not be treated as an applicable large employer if it reasonably expects (1) its workforce to exceed 50 full-time employees (including FTEs) for 120 days or fewer during the current calendar year, and (2) the employees in excess of 50 employed during such 120-day period to be seasonal workers.

D. Application of employer aggregation rules to determination of status as an applicable large employer

Section 4980H(c)(2)(C)(i) provides that, for purposes of determining whether an employer is an applicable large employer, all persons treated as a single employer under section 414(b), (c), (m) or (o) are treated as one employer. Comments were received both in favor of and opposed to this aggregation rule; however, the rule is explicitly set forth in the statute and is thus retained. While the final regulations therefore incorporate this rule, they also provide, consistent with the proposed regulations, that the determination of any potential assessable payment under section 4980H(a) or (b) is made separately for each entity (referred to as an applicable large employer member) that together with other entities is treated as the applicable large employer. For a discussion of the determination of any potential liability under section 4980H, see section X of this preamble.

The final regulations continue to reserve on the application of the employer aggregation rules under section 414(b), (c), (m) and (o) to government entities, as well as to churches or conventions or associations of churches (as defined in § 1.170A–9(b)). Until further guidance is issued, those entities may apply a reasonable, good faith interpretation of section 414(b), (c), (m) and (o) in determining their status as an applicable large employer.

E. Predecessor employers

Section 4980H(c)(2)(C)(iii) provides that, for purposes of determining whether an employer is an applicable large employer, any reference to an employer includes a reference to any predecessor of the employer. As with the proposed regulations, the final regulations reserve with respect to specific rules for identifying a predecessor employer (or the corresponding successor employer). The Treasury Department and the IRS continue to consider development of rules for identifying a predecessor employer (or the corresponding successor employer), and until further guidance is issued, taxpayers may rely upon a reasonable, good faith interpretation of the statutory provision on predecessor (and successor) employers for purposes of the applicable large employer determination. For this purpose, use of the rules developed in the employment tax context for determining when wages paid by a predecessor employer may be considered as having been paid by the successor employer (see § 31.3121(a)(1)–1(b)) is deemed reasonable.

F. Administrative period

As set forth in section XV.D.3 of this preamble, the Treasury Department and the IRS have concluded that transition relief for the 2015 applicable large employer determination is appropriate because employers will be becoming familiar with the applicable large employer determination method and applying it for the first time with respect to 2014 (to determine their status for 2015).

In addition, commenters suggested that section 4980H should not apply to employers for a period of time after the end of the calendar year so that employers that are close to the 50 full-time employee (plus FTE) threshold, whose status may be affected by data from the final calendar months of the calendar year, have time to respond to becoming an applicable large employer. To address this concern, the final regulations provide, with respect to an employee who was not offered coverage at any point in the prior calendar year, that if the applicable large employer offers coverage on or before April 1 of the first year in which the employer is an applicable large employer, the employer will not be subject to an assessable payment (for January through March of the first year the employer is an applicable large employer) under section 4980H(a) by reason of its failure to offer coverage to the employee for January through March of that year, and the employer will not be subject to an assessable payment (for January through March of the first year the employer is an applicable large employer) under section 4980H(b) if the coverage offered provides MV. However, if the employer does not offer coverage to the employee by April 1, the employer may be subject to a section 4980H(a) assessable payment for those initial calendar months in addition to any subsequent calendar months for which coverage is not offered, and if the employer offers coverage by April 1 but the coverage does not provide MV, the employer may be subject to a section 4980H(b) assessable payment for those initial calendar months (in addition to any subsequent calendar months for which coverage does not provide MV or is not affordable). This rule applies only during the first year for which an employer is an applicable large employer (even if the employer falls below the 50 full-time employee plus FTE threshold for a subsequent year and then expands and becomes an applicable large employer again).

G. Full-time equivalent employees

Full-time equivalent employees are included in the applicable large employer determination. See § 54.4980H–2(c). A commenter suggested that the final regulations provide rounding rules for the monthly FTE calculation. The number of FTEs for each calendar month in the preceding calendar year is determined by calculating the aggregate number of hours of service for that calendar month for employees who were not full-time employees (but not more than 120 hours of service for any employee) and dividing that number by 120. The proposed regulations and these final regulations provide that in determining the number of FTEs for each calendar month, fractions are taken into account. In response to a request for a rounding rule, the final regulations provide, as an option, that an employer may round the resulting monthly FTE calculation to the nearest one hundredth. For example, an employer with a calculation of 30.544 FTEs for a calendar month may round that number to 30.54 FTEs.

H. Application of employment break period rules and special unpaid leave rules to determination of applicable large employer status

The proposed regulations and these final regulations provide a method for determining full-time employee status, referred to as the look-back measurement method, under which employers may determine the status of an employee as a full-time employee during a subsequent period (referred to as the stability period), based upon the hours of service of the employee in a prior period (referred to as the measurement period). See § 54.4980H–3(d). The proposed regulations and these final regulations also provide a method under which special unpaid leave and employment break periods during a measurement period are not treated as a period during which zero hours of service are credited when applying the look-back measurement method. See § 54.4980H–3(d)(6). Commenters suggested that these rules be extended to the applicable large employer determination calculation so that periods during which an employee experiences special unpaid leave or an employment break period would not be counted as periods of zero hours of service, as counting those periods in that manner brings down the average hours of service for the employee (which will reduce the full-time employee and FTE counts). Because the statute explicitly provides the method for determining applicable large employer status, including counting employees who do not average 30 hours of service per week, the final regulations do not adopt this suggestion.

VI. Hours of Service

The identification of an employer’s full-time employees and FTEs for purposes of determining its status as an applicable large employer, and of an employer’s full-time employees for purposes of determining any potential liability under section 4980H, is based on each employee’s hours of service. The following section discusses the rules for determining an employee’s hours of service.

The final regulations adopt the general definition of hours of service set forth in the proposed regulations. However, as discussed in sections VI.B and VI.C of this preamble, the final regulations include further rules to clarify or modify the application of the rules for crediting hours of service to address various situations raised in the comments.

A. General definition of hours of service

Section 4980H(c)(4)(B) provides that the Secretary of the Treasury, in consultation with the Secretary of Labor, will prescribe such regulations, rules and guidance as may be necessary to determine the hours of service of an employee, including rules for the application of section 4980H to employees who are not compensated on an hourly basis. In consultation with the Secretary of Labor, the Treasury Department and the IRS formulated rules set forth in the proposed regulations that generally were based on the definition of the term hour of service for purposes of the rules related to the crediting of hours of service under a qualified retirement plan (see 29 CFR 2530.200b–2(a)), with certain modifications.

Specifically, the proposed regulations define an hour of service to mean each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, and each hour for which an employee is paid, or entitled to payment by the employer for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence (as defined in 29 CFR 2530.200b–2(a)).

For employees paid on an hourly basis, an employer is required to calculate actual hours of service from records of hours worked and hours for which payment is made or due. For employees paid on a non-hourly basis (such as salaried employees), an employer may calculate the actual hours of service using the same method as for hourly employees, or use a days-worked equivalency crediting the employee with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service, or a weeks-worked equivalency whereby an employee would be credited with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service. The proposed regulations prohibit use of these equivalencies, however, in circumstances in which their use would result in a substantial understatement of an employee’s hours of service in a manner that would cause that employee not to be treated as a full-time employee.

Comments were received on the days-worked and weeks-worked equivalency methods. Commenters requested that the number of hours of service credited under the equivalency methods be increased from eight hours per day or 40 hours per week to 10 hours per day or 45 hours per week, consistent with equivalency methods contained in regulations issued by DOL. See 29 CFR 2530.200b–3(e). The higher equivalency amounts under the DOL regulations are intended to provide an expansive standard for the number of hours an employee is credited with for purposes of eligibility, vesting and accrual of benefits in a pension plan. In the context of section 4980H, an equivalency of eight hours per day or 40 hours per week is more appropriate.

Commenters requested clarification of the circumstances under which an employee must be credited with service under the equivalency methods. Specifically, commenters asked whether an employee must have actually worked one hour of service in a day or week to be credited with eight or 40 hours of service respectively for that period. The equivalency methods contained in the proposed regulations provide that hours must be credited for any day or week in which the employee would otherwise be required to be credited with one hour of service if treated as an hourly employee. As described previously in this section VI.A, under the service crediting method applicable to hourly employees, an hourly employee must be credited with hours of service for certain hours in which no services are performed but with respect to which payment is made or owed by the employer (such as certain hours of paid leave). Accordingly, the equivalency methods do not require that an employee have actually worked an hour of service in a day or week to be credited with eight or 40 hours of service with respect to that day or week. This approach is the same as the equivalency rule for crediting hours of service under an employee pension benefit plan under DOL regulations at 29 CFR 2530.200b–3(e).

The preamble to the proposed regulations states that an employer may change the method of calculating non-hourly employees’ hours of service for each calendar year. At one commenter’s request, this rule has been added to the text of the final regulations. As set forth in the proposed and final regulations, an employer is not required to use the same method of calculating a non-hourly employee’s hours of service for all non-hourly employees, and may apply different methods of calculating a non-hourly employee’s hours of service for different categories of non-hourly employees, provided that the categories are reasonable and consistently applied. An employer may change the method of calculating a non-hourly employee’s hours of service for one or more categories of non-hourly employees for each calendar year as well.

One commenter asked whether an employer is required to calculate hours of service using all three hours of service calculation methods provided for non-hourly employees (actual hours and two equivalencies), and if an employer is required to classify the employee as a full-time employee if the employee would have such status under any of the methods. The regulations indicate that the equivalency methods are optional, and that an employer choosing to use equivalencies may determine hours of service using one of the equivalency methods. Accordingly, employers are not required to use more than one method of determining hours of service for any particular employee.

Commenters requested that the equivalency methods be expanded to include employees who are compensated on an hourly basis. Because employers are required to maintain records of hours worked in the case of employees who are compensated on an hourly basis, and because use of the equivalency methods could in some cases understate or overstate the number of hours actually worked by such employees, the final regulations do not adopt this suggestion.

One commenter requested that the anti-abuse rule prohibiting the use of an equivalency method if the result is to substantially understate an employee’s hours of service in a manner that would cause the employee not to be treated as a full-time employee be expanded to also prohibit the use of an equivalency method if the result is to understate hours of service for a substantial number of employees (even if no given employee’s hours of service are understated substantially and even if the understatement would not cause the employee to not be treated as a full-time employee). This expanded rule could affect the calculation of FTEs as part of the applicable large employer determination. For example, if an employer had 100 non-hourly employees who each worked two days per week for 10 hours each day, the employer could not use the days-worked equivalency because that would result in 400 fewer hours of service being included in the FTE calculation for each week, even though the understatement would not affect the employees’ treatment as full-time employees (because these employees are not full-time employees, regardless of the use of equivalencies). The final regulations adopt this suggestion.

B. Exclusions from definition of hour of service

Commenters requested that hours of service performed in certain capacities not be counted as an hour of service. The final regulations adopt the following changes in response to these comments.[7]

1. Volunteer Employees

Commenters requested that hours of service performed in the capacity of a volunteer for a government entity or tax-exempt organization not be counted as hours of service for purposes of section 4980H. Under the definition of hour of service outlined in these regulations, an hour of service is generally defined as an hour for which an employee is paid or entitled to payment. Accordingly, hours worked by a volunteer who does not receive (and is not entitled to receive) compensation in exchange for the performance of services are not treated as hours of service for purposes of section 4980H.

Commenters noted, however, that some volunteers receive compensation in the form of expense reimbursements, stipends, contributions to employee benefit plans, or nominal wages. Local governments, for instance, noted that many volunteer firefighters or other emergency responders are paid a salary or an hourly wage, generally at a rate lower than the rate paid to non-volunteers performing services in a similar capacity. Other volunteer firefighters or emergency responders may receive expense reimbursements or other fees each time they respond to a call. Commenters generally expressed concern that volunteer service would be discouraged if volunteer hours were required to be counted when determining whether the individual is a full-time employee for purposes of section 4980H.

In response to these concerns, the final regulations provide that hours of service do not include hours worked as a “bona fide volunteer.” For this purpose, the definition of “bona fide volunteer” is generally based on the definition of that term for purposes of section 457(e)(11)(B)(i), which provides special rules for length of service awards offered to certain volunteer firefighters and emergency medical providers under a municipal deferred compensation plan. For purposes of section 4980H, however, bona fide volunteers are not limited to volunteer firefighters and emergency medical providers. Rather, bona fide volunteers include any volunteer who is an employee of a government entity or an organization described in section 501(c) that is exempt from taxation under section 501(a) whose only compensation from that entity or organization is in the form of (i) reimbursement for (or reasonable allowance for) reasonable expenses incurred in the performance of services by volunteers, or (ii) reasonable benefits (including length of service awards), and nominal fees, customarily paid by similar entities in connection with the performance of services by volunteers.

2. Student Employees

Commenters from educational organizations requested that special rules apply for determining the hours of service of employees who are also students of an educational organization. These comments generally fell into two categories. First, commenters expressed concern about the impact of section 4980H on federal work study programs under which a student receives financial aid in the form of a federally subsidized work assignment. Commenters posited that if educational organizations were required to aggregate hours of service performed by the student employee in the context of the work study program with hours of service performed by the student employee for the educational organization in other capacities (for example, a non-work study position with the campus bookstore) in determining whether the student is a full-time employee for purposes of section 4980H, it could discourage educational organizations from hiring students in other capacities in addition to their work study positions. Second, commenters requested that hours of service performed for an outside employer by students through an internship or externship program sponsored by an educational organization not be counted as hours of service for the outside employer for section 4980H purposes. The commenters suggested that, without such an exception, outside employers would be discouraged from offering internships or externships to students, which could have a detrimental impact on the educational system.

The federal work study program, as a federally subsidized financial aid program, is distinct from traditional employment in that its primary purpose is to advance education. See 34 CFR 675. To avoid having the application of section 4980H interfere with the attainment of that goal, the final regulations provide that hours of service for section 4980H purposes do not include hours of service performed by students in positions subsidized through the federal work study program or a substantially similar program of a State or political subdivision thereof. However, the final regulations do not include a general exception for student employees. All hours of service for which a student employee of an educational organization (or of an outside employer) is paid or entitled to payment in a capacity other than through the federal work study program (or a State or local government’s equivalent) are required to be counted as hours of service for section 4980H purposes.

With respect to internships and externships, services by an intern or extern would not count as hours of service for section 4980H purposes under the general definition of hours of service contained in the regulations to the extent that the student does not receive, and is not entitled to, payment in connection with those hours. However, excluding hours of service for which interns or externs receive, or are entitled to receive, compensation from the employer from the definition of hours of service for section 4980H purposes would be subject to potential misuse through labeling positions as internships or externships to avoid application of section 4980H. The final regulations do not adopt a special rule for student employees working as interns or externs for an outside employer, and, therefore, the general rules apply, including the option to use the look-back measurement method, as appropriate, or the monthly measurement method.

3. Members of Religious Orders

A commenter requested clarification about whether members of religious orders must be treated as full-time employees of their orders for purposes of section 4980H. As noted in section VI.C of this preamble, the Treasury Department and the IRS continue to consider additional rules for the determination of hours of service for purposes of section 4980H with respect to certain categories of employees whose hours of service are particularly challenging to identify or track or for whom the final regulations’ general rules for determining hours of service may present special difficulties, including hours worked by members of religious orders for the orders to which they belong. Until further guidance is issued, a religious order is permitted, for purposes of determining whether an employee is a full-time employee under section 4980H, to not count as an hour of service any work performed by an individual who is subject to a vow of poverty as a member of that order when the work is in the performance of tasks usually required (and to the extent usually required) of an active member of the order.

C. Application of hours of service to certain employees

Commenters requested guidance on the application of the hours of service definition to certain categories of employees whose hours of service are particularly challenging to identify or track or for whom the final regulations’ general rules for determining hours of service may present special difficulties.

The Treasury Department and the IRS continue to consider additional rules for the determination of hours of service for purposes of section 4980H with respect to certain categories of employees (including adjunct faculty, commissioned salespeople, and airline employees), and certain categories of hours associated with work by employees (including layover hours (for example, for airline employees) and on-call hours). The regulation authorizes the promulgation of such rules through additional guidance, published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b)).

Until further guidance is issued, employers of adjunct faculty, employers of employees with layover hours, including the airline industry, and employers of employees with on-call hours, as described in sections VI.C.1 through VI.C.3 of this preamble, respectively, are required to use a reasonable method of crediting hours of service that is consistent with section 4980H. Further, employers of other employees whose hours of service are particularly challenging to identify or track or for whom the final regulations’ general rules for determining hours of service may present special difficulties, such as commissioned salespeople, are required to use a reasonable method of crediting hours of service that is consistent with section 4980H.

A method of crediting hours is not reasonable if it takes into account only a portion of an employee’s hours of service with the effect of characterizing, as a non-full-time employee, an employee in a position that traditionally involves at least 30 hours of service per week. For example, it is not a reasonable method of crediting hours to fail to take into account travel time for a travelling salesperson compensated on a commission basis. Paragraphs C.1 through C.3 of this section VI of the preamble describe methods of crediting hours of service that are (or are not) reasonable to use with respect to adjunct faculty, layover hours, including for airline industry employees, and on-call hours. The examples of reasonable methods provided are not intended to constitute the only reasonable methods of crediting hours of service. Whether another method of crediting hours of service in these situations is reasonable is based on the relevant facts and circumstances.

1. Adjunct Faculty

Commenters raised issues relating to adjunct faculty who receive compensation for teaching a certain number of classes (or credits) and whose compensation is not based on the actual time spent on non-classroom activities such as class preparation, grading papers and exams, and counseling students. Comments from employers generally suggested that the hours of service equivalencies for non-hourly employees (eight hours per day or 40 hours per week) were too high for this purpose, but that counting actual hours would be administratively burdensome. These commenters suggested various methods for permitting assumptions for hours of service that would be applied for each task completed, for example, a set number of hours of service per week per class or credit taught by an adjunct faculty member. Comments from employees and their representatives included two very different types of suggestions. Some suggested that any assumption be set sufficiently high and be subject to robust periodic review so as not to fail to attribute adequate hours of service for the work performed. Others suggested that the assumption be set at a relatively moderate level that would avoid giving undue incentives for institutions to reduce adjunct faculty members’ teaching assignments to avoid full-time employee status.

In addition, comments from adjunct faculty members and educational organizations requested the adoption of a method whereby an adjunct faculty member would be treated as a full-time employee for purposes of section 4980H only if the faculty member were assigned a course load that was equivalent to (or, as requested in some comments, at least 75 percent of) the average course load assigned to faculty members who are treated as full-time employees by the particular educational organization or academic department. The course loads assigned to other faculty members may be a relevant factor in an employer’s determination of the number of hours of service to be credited to an adjunct faculty member. However, the course loads of faculty treated as full-time employees may vary considerably, making implementation of the proposed approach very difficult to administer.

Until further guidance is issued, employers of adjunct faculty (and of employees in other positions that raise analogous issues with respect to the crediting of hours of service) are required to use a reasonable method for crediting hours of service with respect to those employees that is consistent with section 4980H. With respect to adjunct faculty members of an educational organization who are compensated on the basis of the number of courses or credit hours assigned, the commenters noted that a wide variation of work patterns, duties, and circumstances apply in different institutions, academic disciplines, and departments, and apply to different courses and individuals, and that this might factor into the reasonableness of a particular method of crediting hours of service in particular circumstances.

Various commenters also suggested, however, that, in the interest of predictability and ease of administration in crediting hours of service for purposes of section 4980H, regulations specify a multiple that might be applied to credit additional hours of service for each credit hour or hour of classroom time assigned to the adjunct faculty member. Commenters suggested a number of possible multiples that might be used for this purpose. After reviewing these comments, the Treasury Department and the IRS have determined that, until further guidance is issued, one (but not the only) method that is reasonable for this purpose would credit an adjunct faculty member of an institution of higher education with (a) 2 1/4 hours of service (representing a combination of teaching or classroom time and time performing related tasks such as class preparation and grading of examinations or papers) per week for each hour of teaching or classroom time (in other words, in addition to crediting an hour of service for each hour teaching in the classroom, this method would credit an additional 1 1/4 hours for activities such as class preparation and grading) and, separately, (b) an hour of service per week for each additional hour outside of the classroom the faculty member spends performing duties he or she is required to perform (such as required office hours or required attendance at faculty meetings).

Although further guidance may be issued regarding these matters, the method described in the preceding paragraph may be relied upon at least through the end of 2015. To the extent any future guidance modifies an employer’s ability to rely on that method, the period of reliance will not end earlier than January 1 of the calendar year beginning at least six months after the date of issuance of the guidance (but in no event earlier than January 1, 2016). This extended period of reliance is provided so that if the method described in the preceding paragraph is modified or replaced, employers will have sufficient time to make necessary adjustments. Of course, employers may credit more hours of service than would result under the method described in the preceding paragraph and also may offer coverage to additional employees beyond those identified as full-time employees under that method.

2. Layover Hours for Airline Industry Employees and Others

Commenters noted that pilots and flight attendants often are required, as a practical matter, to remain overnight between flights at a location other than their residence. The Treasury Department and the IRS continue to consider additional rules for the determination of hours of service, including layover hours, for purposes of section 4980H with respect to certain categories of employees whose hours of service are particularly challenging to identify or track or for whom the final regulations’ general rules for determining hours of service may present special difficulties. Until further guidance is issued, with respect to categories of employees whose hours of service are particularly challenging to identify or track or for whom the final regulations’ general rules for determining hours of service may present special difficulties, employers are required to use a reasonable method for crediting hours of service that is consistent with section 4980H.

With respect to layover hours, it is not reasonable for an employer to not credit a layover hour as an hour of service if the employee receives compensation for the layover hour beyond any compensation that the employee would have received without regard to the layover hour or if the layover hour is counted by the employer towards the required hours of service for the employee to earn his or her regular compensation. For example, if an employer requires that an employee perform services for 40 hours per week to earn full salary, and credits “layover hours” towards the 40 hours, then it would not be reasonable for the employer to fail to credit the layover hours as hours of service.

For layover hours for which an employee does not receive additional compensation and that are not counted by the employer towards required hours of service, it would be reasonable for an employer to credit an employee in the airline industry with 8 hours of service for each day on which an employee is required, as a practical matter, to stay away from home overnight for business purposes (that is, 8 hours each day (or 16 hours total) for the two days encompassing the overnight stay). The employee must be credited with the employee’s actual hours of service for a day if crediting 8 hours of service substantially understates the employee’s actual hours of service for the day (including layover hours for which an employee receives compensation or that are counted by the employer towards required hours of service). Other methods of counting hours of service may also be reasonable, depending on the relevant facts and circumstances.

3. On-call Hours

Commenters requested that “on-call” hours, for which an employee has been directed by the employer to remain available to work, not be treated as hours of service unless the employee is directed to perform services. The commenters noted that a variety of compensation structures may apply to on-call hours. In some cases, employees are paid a reduced hourly wage for on-call hours. In other cases, employees are not paid additional compensation for on-call hours but are required to remain on call periodically as a condition of employment.

The Treasury Department and the IRS continue to consider additional rules for determining hours of service for purposes of section 4980H with respect to certain work arrangements, including on-call hours, or categories of employees whose hours of service are particularly challenging to identify or track or for whom the final regulations’ general rules for determining hours of service may present special difficulties. Until further guidance is issued, employers of employees who have on-call hours are required to use a reasonable method for crediting hours of service that is consistent with section 4980H. It is not reasonable for an employer to fail to credit an employee with an hour of service for any on-call hour for which payment is made or due by the employer, for which the employee is required to remain on-call on the employer’s premises, or for which the employee’s activities while remaining on-call are subject to substantial restrictions that prevent the employee from using the time effectively for the employee’s own purposes.

VII. Identification of Full-Time Employees

 

A. In general

Section 4980H(c)(4) defines the term full-time employee to mean, with respect to any month, an employee who is employed on average at least 30 hours of service per week. The final regulations provide two methods for determining full-time employee status—the monthly measurement method (described in section VII.B of this preamble) and the look-back measurement method (described in section VII.C of this preamble).

The final regulations reiterate that the requirements for use of the look-back measurement method and the monthly measurement method prescribe minimum standards for the identification of full-time employees. Employers may always treat additional employees as eligible for coverage, or otherwise offer coverage more expansively than would be required to avoid an assessable payment under section 4980H, subject to compliance with any nondiscrimination or other applicable requirements.

1. Thirty-Hour Threshold

Commenters requested that the 30 hours of service per week threshold be increased as part of the final regulations, either generally or as applied with respect to certain positions or industries. Because the statute is explicit that the threshold for status as a full-time employee is an average of 30 hours of service per week, the final regulations do not adopt these suggestions.

Other commenters pointed to employees whose hours of service are restricted by federal or other law, arguing that in such cases a lower threshold should be applied to determine whether the employee is a full-time employee. In particular, airline pilots explained that federal aviation law restricts the number of hours that a pilot may fly, resulting in many pilots averaging fewer than 30 hours of service per week despite having what may be considered a full-time position within the standards of the industry. However, section 4980H contains no exceptions from the requirement that an employee average at least 30 hours of service per week to be a full-time employee. Accordingly, the 30 hours of service threshold is not adjusted for any particular industry or position of employment in the final regulations. However, see the discussion of the application of hours of service to certain employees at section VI.C of this preamble.

2. Monthly Equivalency

The proposed regulations provide that, for purposes of determining full-time employee status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week, provided that the employer applies this equivalency rule on a reasonable and consistent basis. This monthly standard takes into account that the average month consists of more than four weeks. Commenters suggested that the 130 hours of service monthly standard is not an appropriate proxy for 30 hours of service per week during certain shorter calendar months. However, the 130 hours of service monthly standard may also be lower than an average of 30 hours of service per week during other longer months of the calendar year (for example, the seven calendar months that consist of 31 days). Under the look-back measurement method in particular, any effect of this approximation will balance out over the calendar year (for example, over a 12-month measurement period, over two successive six-month measurement periods, or over four successive three-month measurement periods).

In developing the final regulations, the Treasury Department and the IRS considered whether the 130 hours of service monthly equivalency standard should apply to the monthly measurement method, described in section VII.B of this preamble, under which the determination of full-time employee status is based on each calendar month. A standard was considered that would prorate any additional days beyond the minimum 28 days in a calendar month, so that, for example, the months of January, March, May, July, August, October, and December would be treated as requiring 133 hours of service for full-time employee status (equal to 4 3/7 weeks multiplied by 30 hours of service per week). However, that standard would result in no less than three different monthly equivalencies (one for February, one for the four calendar months with 30 days, and one for the seven calendar months with 31 days). In addition, a calendar month may start on any day of the week, and there is no standard workweek for all employees so that some employees may, for example, perform services on weekends or for longer or varying shifts rather than set hours Monday through Friday. For these reasons, different standards for each calendar month would not only be an additional burden for employers, but also do little to address the variation in treatment that may occur, for example, between an employee generally performing hours of service on the weekend and an employee performing services on business days, solely due to the day of the week upon which a calendar month begins. Accordingly, the final regulations adopt a standard of 130 hours of service per calendar month for determining whether an employee is a full-time employee under both the look-back measurement method and the monthly measurement method. The 130 hours of service standard is equal to 30 hours of service per week multiplied by 52 weeks and divided by 12 calendar months.

3. Aggregation of Hours of Service Across Applicable Large Employer Members

The proposed regulations provide that, for purposes of identifying a full-time employee, hours of service must be counted across all applicable large employer members. For example, an employee who for a calendar month averaged 25 hours of service per week at one applicable large employer member and 15 hours of service per week at another applicable large employer member of the same applicable large employer would be a full-time employee for that calendar month.

Commenters requested that an employee’s status as a full-time employee be determined separately for each applicable large employer member based upon the employee’s hours of service at each particular applicable large employer member. The final regulations do not adopt such a rule because it would often produce inequitable results by classifying an employee performing at least 30 hours of service per week for closely related applicable large employer members (for example, two corporations that are wholly-owned by another entity or individual) as not a full-time employee while classifying other employees working the same number of hours of service for one of those entities as full-time employees. For a discussion of how any assessable payment under section 4980H for a calendar month would be allocated among applicable large employer members if a full-time employee performed services for two or more applicable large employer members during the same calendar month, see section X of this preamble. For a discussion of how one applicable large employer member’s offer of coverage applies to other applicable large employer members in the same applicable large employer, see section IX of this preamble.

B. Monthly measurement method

Commenters requested further information about the identification of full-time employees by employers electing not to use the look-back measurement method. Pursuant to the statute, these full-time employees would be identified based on the hours of service for each calendar month; accordingly, these regulations refer to this method of identifying full-time employees as the monthly measurement method.

Under the look-back measurement method set forth in the proposed regulations, if an employee is reasonably expected at his or her start date to be a full-time employee, an employer that sponsors a group health plan that offers coverage to the employee at or before the conclusion of the employee’s initial three full calendar months of employment will not be subject to an assessable payment under section 4980H by reason of its failure to offer coverage to the employee for up to the initial three full calendar months of employment. See section VII.D of this preamble for a discussion of clarifications made to this rule in the final regulations. In developing the final regulations, the Treasury Department and the IRS considered whether a similar rule should be provided under the monthly measurement method.

Under the monthly measurement method in the final regulations, an employer will not be subject to an assessable payment under section 4980H(a) with respect to an employee because of a failure to offer coverage to that employee before the end of the period of three full calendar months beginning with the first full calendar month in which the employee is otherwise eligible for an offer of coverage under a group health plan of the employer if the employee is offered coverage no later than the day after the end of that three-month period. If the coverage for which the employee is otherwise eligible provides MV, the employer also will not be subject to an assessable payment under section 4980H(b) during that three-month period. For this purpose, an employee is otherwise eligible for an offer of coverage in a month if the employee meets all conditions to be offered coverage under the plan other than the completion of a waiting period, within the meaning of § 54.9801–2.[8] This rule applies only once per period of employment of an employee and applies with respect to each of the three full calendar months for which the employee is otherwise eligible for an offer of coverage under a group health plan of the employer. Accordingly, the relief may be available even if the employee terminates before that date (and before coverage is offered).

To avoid inequitable application of the rule that applies to employees who are first otherwise eligible for an offer of coverage by characterizing former employees as rehired employees after a short period of absence, the final regulations clarify that under the monthly measurement method, an employee must be treated as a continuing employee, rather than a new hire, unless the employee has had a period of at least 13 weeks during which no hours of service were credited (26 weeks for an employee of an employer that is an educational organization). At the employer’s option, the employee may be treated as a new hire if the employee is not credited with any hours of service during a period that is both at least four consecutive weeks’ duration and longer than the employee’s immediately preceding period of employment. For a description of the rehire rules, see section VII.E of this preamble.

In determining how an employer should treat periods during which an employee is not credited with hours of service, the final regulations clarify that under the monthly measurement method, the special unpaid leave and employment break period rules do not apply. That is because determinations under the monthly measurement method are based on hours of service during that particular calendar month and are not based on averaging over a prior measurement period. For a description of the special unpaid leave and employment break period rules see section VII.E.2 of this preamble.

Commenters requested that the monthly measurement method be applied in a manner that approximated or otherwise took into account payroll periods. To provide additional flexibility and reduce administrative burden on employers, the final regulations allow an employer to determine an employee’s full-time employee status for a calendar month under the monthly measurement method based on the hours of service over successive one-week periods. Under this optional method, referred to as the weekly rule, full-time employee status for certain calendar months is based on hours of service over four-week periods and for certain other calendar months on hours of service over five-week periods. In general, the period measured for the month must contain either the week that includes the first day of the month or the week that includes the last day of the month, but not both. For this purpose, week means any period of seven consecutive calendar days applied consistently by the applicable large employer member for each calendar month of the year. For calendar months calculated using four week periods, an employee with at least 120 hours of service is a full-time employee, and for calendar months calculated using five week periods, an employee with at least 150 hours of service is a full-time employee. However, for purposes of coordination with both the premium tax credit and the section 5000A individual shared responsibility provisions, which are applied on a calendar month basis, an applicable large employer member is only treated as having offered coverage under section 4980H for a calendar month if it offers coverage to a full-time employee for the entire calendar month, regardless of whether the employer uses the weekly rule.

C. Look-back measurement method

 

1. In General

The proposed regulations provide a method, referred to as the look-back measurement method, under which employers may determine the status of an employee as a full-time employee during a future period (referred to as the stability period), based upon the hours of service of the employee in a prior period (referred to as the measurement period). The look-back measurement method for identifying full-time employees is available only for purposes of determining and computing liability under section 4980H and not for purposes of determining status as an applicable large employer.

Under the look-back measurement method for ongoing employees, an applicable large employer member determines each ongoing employee’s full-time employee status by looking back at a standard measurement period of at least three months but not more than 12 months, as determined by the employer. The applicable large employer member determines the months in which the standard measurement period starts and ends, provided that the determination must be made on a uniform and consistent basis for all employees in the same category. If the applicable large employer member determines that an employee was employed on average at least 30 hours of service per week during the standard measurement period, then the applicable large employer member treats the employee 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 the worker remains an employee.

The proposed regulations also provide look-back measurement method rules for new employees, including rules for employees who are reasonably expected to be full-time employees at the start date, and those who are variable hour employees or seasonal employees. A variable hour employee or seasonal employee will have his or her status as a full-time employee determined after an initial measurement period. The proposed regulations then provide transition guidance under which a new employee transitions into having his or her status as a full-time employee determined under the look-back measurement method rules applicable to ongoing employees.

Although some commenters suggested that the look-back measurement method of identifying full-time employees be eliminated, other commenters requested that it be retained. The look-back measurement method is intended as a method of crediting employees with hours of service they earn (during a measurement period) while also providing employers predictability in being able to identify full-time employees before the beginning of a potential coverage period (during a stability period). After reviewing the comments, the Treasury Department and the IRS have concluded that this method provides a practical and fair method for determining average hours of service that will facilitate compliance with section 4980H. Accordingly, the final regulations continue to permit a look-back measurement method as an optional method for identifying full-time employees.

2. Reasonable Expectations with Respect to a New Employee

Under both the proposed regulations and the final regulations, the application of the look-back measurement method to a new employee depends on the employer’s reasonable expectations with respect to the status of the new employee at his or her start date. Under the final regulations, if a new employee who is reasonably expected to be a full-time employee at his or her start date is offered coverage by the first day of the month immediately following the conclusion of the employee’s initial three full calendar months of employment (and if the employee was otherwise eligible for an offer of coverage during those three months), the employer is not subject to a section 4980H assessable payment for those initial three full calendar months of employment (or for the period prior to the initial three full calendar months of employment), provided that to avoid liability under section 4980H(b) for the initial three full calendar months, the coverage offered after the initial three full calendar months of employment must provide MV. Otherwise, with respect to a new employee who is reasonably expected to be a full-time employee at his or her start date, the employer may be subject to a section 4980H assessable payment beginning with the first full calendar month in which an employee is a full-time employee.

Commenters requested further guidance on the circumstances under which an employer may reasonably expect a new hire to be a full-time employee. In response to these comments, the final regulations provide that whether an employer’s determination that a new hire is not a full-time employee (or is a full-time employee) is reasonable is based on the facts and circumstances. Factors to consider include, but are not limited to, whether the employee is replacing an employee who was or was not a full-time employee, the extent to which employees in the same or comparable positions are or are not full-time employees, and whether the job was advertised, or otherwise communicated to the new hire or otherwise documented (for example, through a contract or job description), as requiring hours of service that would average 30 (or more) hours of service per week or less than 30 hours of service per week.

Commenters also requested that employers that are educational organizations be prohibited from taking potential employment break periods into account in determining their expectations of future hours of service. For a description of the employment break period rule, see section VII.E.2 of this preamble. The final regulations clarify that educational organization employers cannot take into account the potential for, or likelihood of, an employment break period in determining their expectations of future hours of service.

3. Administrative Period

Under the proposed and final regulations, an applicable large employer member using the look-back measurement method may, at its option, elect to add an administrative period of no longer than 90 days between the measurement period and the stability period. Under the proposed regulations, the term administrative period is defined as an optional period, selected by an applicable large employer member, of no longer than 90 days beginning immediately following the end of a measurement period and ending immediately before the start of the associated stability period. However, the proposed regulations also provide that the period between a variable hour or seasonal employee’s start date and the beginning of the initial measurement period must be taken into account in determining the administrative period. The definition of administrative period in the final regulations is revised to reflect that it also includes periods before the initial measurement period. Thus, the combined length of the period before the start of the initial measurement period and the period beginning immediately after the end of the initial measurement period and ending immediately before the beginning of the associated stability period is subject to an overall limit of 90 days.

Commenters requested that the maximum permissible administrative period be extended from 90 days to three full calendar months. The proposed regulations regarding the administrative period in these circumstances were intended to allow employers to structure their plans to coordinate with section 2708 of the PHS Act (relating to the application of the 90-day limitation on waiting periods) in all circumstances. For this reason, the final regulations do not adopt this suggestion.

4. Rules for Full-Time Employee’s Stability Periods that are Longer than the Associated Measurement Periods

In general, under the proposed regulations, the minimum length of a measurement period is three months but the minimum length of a stability period for an employee who is a full-time employee based on hours of service in a measurement period is six months. Commenters requested that a three-month stability period be permitted if the employer uses a three-month measurement period and the employee is determined to be a full-time employee during the measurement period. The Treasury Department and the IRS remain concerned that permitting stability periods as short as three months for employees who are full-time employees based on hours of service in the measurement period could lead to employees moving in and out of employer coverage (and potentially Exchange coverage) multiple times during the year, which would be undesirable from both the employee’s and employer’s perspective, and could also create administrative challenges for the Exchanges. Accordingly, this suggestion is not adopted.

Commenters also asked for clarification of the measurement period that may be used for the subsequent six-month stability period in cases in which a less-than-six month measurement period is used (such as a three-month measurement period) and the employee averages at least 30 hours of service per week during the measurement period, so that a stability period of at least six months must be applied. The final regulations clarify that the stability period refers to the period immediately following the measurement period and any associated administrative period. Therefore, for employees who average at least 30 hours of service per week during a measurement period, who thus must be treated as full-time employees during an associated six-month stability period, the next measurement period begins at a date during the stability period that is the latest date that will not result in any period between the end of that stability period and the beginning of the next stability period associated with the next measurement period. For example, suppose an employer uses a three-month measurement period consisting of January through March of Year 1, followed by a one month administrative period consisting of April of Year 1. In this example, employees who average 30 hours of service per week during the measurement period consisting of January through March of Year 1 must be treated as full-time employees during a six-month stability period consisting of May through October of Year 1. Under the final regulations, the next measurement period would be July through September of Year 1, the associated administrative period would be October of Year 1, and the next associated stability period would begin immediately at the end of the administrative period. Thus, the stability period for employees determined to be full-time employees during the measurement period consisting of July through September of Year 1 would consist of November of Year 1 through April of Year 2 and there would be no period between the end of the first stability period (October 31 of Year 1) and the beginning of the next stability period (November 1 of Year 1). For ongoing employees that do not average at least 30 hours of service per week during a measurement period, the length of the stability period cannot exceed the length of the measurement period.

5. Employee Categories to which Different Measurement and Stability Periods may be Applied

The proposed regulations permit an employer to use measurement periods and stability periods that differ either in length or in their starting and ending dates for different categories of employees specified in the regulations, provided that the employees within each category are treated consistently. The categories specified in the proposed regulations are salaried employees and hourly employees, employees whose primary places of employment are in different states, collectively bargained employees and non-collectively bargained employees, and each group of collectively bargained employees covered by a separate collective bargaining arrangement. Commenters requested that these categories be expanded to, for example, any category established in good faith and consistent with business practices, any category of hourly employees based on payroll classifications, any category of employees of employers in an industry that demonstrates higher turnover than other industries, and any category of employees with turnover that is higher than other categories. The final regulations do not adopt these requests because of the associated administrative difficulties.

Notice 2012–58 had also included employees of different entities as a separate category of employees. The preamble to the proposed regulations provides that because section 4980H generally is applied on an applicable large employer member-by-member basis, including the method of identifying full-time employees, there is no need for a distinct category for employees of different entities, as each such member is a separate entity. However, comments to the proposed regulations requested that the final regulations confirm that different applicable large employer members may use different starting and ending dates and lengths of measurement and stability periods. In response, the final regulations include this confirmation as well as confirmation that different applicable large employer members may use different measurement methods (the look-back measurement method or the monthly measurement method).

6. Variable Hour Employees

As described in the preamble to the proposed regulations, with respect to certain positions of employment, employers have indicated that they could not determine at the start date whether the employee would be a full-time employee because an employee’s hours of service in that position may vary significantly. Particularly in the hospitality and retail industries, employers requested that they be permitted to determine full-time employee status for employees whose hours may vary significantly by first considering hours of service for a period of time after the start date. In response to these comments made to the notices published before the proposed regulations, the proposed regulations generally provide that with respect to these employees, referred to as variable hour employees, an employer could use an initial measurement period, in combination with any administrative period, that did not extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee’s start date. The proposed regulations treat an employee as a variable hour employee if, based on the facts and circumstances at the employee’s start date, the applicable large employer member cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee’s hours of service are variable or otherwise uncertain. For this purpose, the applicable large employer member may not take into account the likelihood that the employee may terminate employment with the applicable large employer (including any member of the applicable large employer) before the end of the initial measurement period. See proposed § 54.4980H–1(a)(43).

Commenters, generally representing employee organizations, suggested that the treatment provided to variable hour employees be removed. In general, these commenters suggested that employers would categorize an excessive number of employees as variable hour employees in order to take advantage of the ability to avoid section 4980H liability while not offering coverage during the first year of employment. These final regulations retain the treatment of variable hour employees because with respect to certain positions of employment involving variable hours, it is not reasonable to require that an employer assume what those hours will be. In response to the comments, however, the final regulations explicitly set forth certain factors to take into account in determining whether the employer, at the employee’s start date, could not determine whether the employee was reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period. These factors are described in section VII.C.2 of this preamble and are set forth at § 54.4980H–1(a)(49).

7. Temporary Staffing Firms

The preamble to the proposed regulations notes that the application of section 4980H may be particularly challenging for temporary staffing firms and requested comments on certain specific areas relevant to temporary staffing firms, including whether new employees of a temporary staffing firm should be deemed or presumed to be variable hour employees for purposes of the look-back measurement method as well as whether special rules should apply to temporary staffing firms for purposes of determining when an employee has separated from service and the application of the rehire rules when an employee returns after a break in service. See section VII.E of the preamble for a discussion of the rehire rules.

Some commenters requested that new employees of a temporary staffing firm be deemed, or alternatively presumed, to be variable hour employees rather than full-time employees for purposes of the look-back measurement method. Other commenters opposed the use of any presumption that employees of temporary staffing firms are variable hour employees, arguing that some of these employees will work predictable schedules averaging at least 30 hours of service per week. Temporary staffing firms vary widely in the types of assignments they fill for their clients and in the anticipated assignments that a new employee will be offered. Accordingly, the final regulations do not adopt a generally applicable presumption.

To accommodate these variations and provide additional guidance, the final regulations set forth additional factors relevant to the determination of whether a new employee of a temporary staffing firm intended to be placed on temporary assignments at client organizations is a variable hour employee. These factors generally relate to the typical experience of an employee in the position with the temporary staffing firm that hires the new employee (assuming the temporary staffing firm employer has no reason to anticipate that the new employee’s experience will differ) and include whether employees in the same position with the temporary staffing firm retain as part of their continuing employment the right to reject temporary placements that the employer temporary staffing firm offers the employee, whether employees in the same position with the temporary staffing firm typically have periods during which no offer of temporary placement is made, whether employees in the same position with the temporary staffing firm typically are offered temporary placements for differing periods of time, and whether employees in the same position with the temporary staffing firm typically are offered temporary placements that do not extend beyond 13 weeks. As demonstrated in the modified and additional examples related to temporary staffing firms, no factor is determinative. In addition, the determination of whether an employee is a variable hour employee is made on the basis of the temporary staffing firm’s reasonable expectations at the start date. An employee may accordingly be classified as a variable hour employee if this categorization was appropriate based on the employer’s reasonable expectations at the start date, even if the employee in fact averages 30 or more hours of service per week over the initial measurement period.

Commenters suggested that the rehire rules should be adjusted for employees of temporary staffing firms by reducing the length of the break in service required before an employee can be treated as a new hire from 26 weeks to 4 weeks or some other duration. The final regulations do not adopt this suggestion in part because the adoption of such a rule may encourage employers to use temporary staffing firms to provide firm employees to perform certain services in order to attempt to improperly avoid offering coverage or incurring liability for assessable payments under section 4980H. For a discussion of the reduction of the break-in-service period under the rehire rules from 26 weeks to 13 weeks for all employers that are not educational organizations see section VII.E of this preamble.

Commenters requested additional guidance on when a temporary staffing firm may treat an employee who is not working on assignments as having separated from service with the firm. Separation from service is relevant in a number of contexts beyond section 4980H, such as eligibility to receive a distribution from a qualified plan (see, for example, section 401(k)(2)(B)(i)(l)) and the requirement to provide a notice of continuation coverage under COBRA (see section 4980B), and temporary staffing firm employers generally have developed various means of determining when an employee has separated from service with the firm for these purposes. Accordingly, until further guidance is issued, temporary staffing firms, like all employers generally, may determine when an employee has separated from service by considering all available facts and circumstances and by using a reasonable method that is consistent with the employer’s general practices for other purposes, such as the qualified plan rules, COBRA, and applicable State law. For a discussion of the rehire rules that apply under section 4980H, see section VII.E of this preamble.

Section II.D.3 of the preamble to the proposed regulations addresses two arrangements under which a client employer may use a temporary staffing firm to attempt to evade application of section 4980H. In one arrangement, the client employer purports to employ an employee for only part of a week, such as 20 hours, and to hire that same individual through a temporary staffing firm for the remaining hours of the week, and then claim that the individual was not a full-time employee of either the client employer or the temporary staffing firm. In the other arrangement, one temporary staffing firm purports to supply a client an individual as a worker for only part of a week, such as 20 hours, while a second temporary staffing firm purports to supply the same client the same individual for the remainder of the week, and then claim that the individual was not a full-time employee of the client or either of the temporary staffing firms. For these reasons and the reasons set forth in section II.D.3 of the preamble to the proposed regulations, the Treasury Department and the IRS continue to be concerned about these arrangements and anticipate that future guidance of general applicability, published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii)(b)), will address them.

8. Seasonal Employees

Under the proposed and final regulations, the look-back measurement method, including the use of the initial measurement period for a newly hired employee, may be applied by an employer to its seasonal employees in the same manner in which the rules apply to variable hour employees. The proposed regulations do not provide a definition of the term seasonal employee but rather reserve on the issue. Section II.C.2.b of the preamble to the proposed regulations indicates that employers are permitted through 2014 to use a reasonable, good faith interpretation of the term seasonal employee for purposes of section 4980H. The preamble further states that the Treasury Department and the IRS contemplated that the final regulations would add to the definition of seasonal employee a specific time limit in the form of a defined period, citing the final sentence of § 1.105–11(c)(2)(iii)(C) as an example that could be adapted for purposes of section 4980H. The Treasury Department and the IRS specifically requested comments on this approach.

Commenters generally supported the proposed treatment of seasonal employees, but had varying notions of the appropriate time limit for a recurring period of service for a seasonal employee, ranging from 45 days to ten months. Consistent with the proposed regulations, the final regulations continue to provide for seasonal employees to be treated under the same rules applicable to variable hour employees. For this purpose, the final regulations provide that a seasonal employee means an employee in a position for which the customary annual employment is six months or less. The reference to customary means that by the nature of the position an employee in this position typically works for a period of six months or less, and that period should begin each calendar year in approximately the same part of the year, such as summer or winter. In certain unusual instances, the employee can still be considered a seasonal employee even if the seasonal employment is extended in a particular year beyond its customary duration (regardless of whether the customary duration is six months or is less than six months). For example, if ski instructors at a resort have a customary period of annual employment of six months, but are asked in a particular year to work an additional month because of an unusually long or heavy snow season, they would still be considered seasonal employees.

An employee in a seasonal position might be promoted or transferred to a permanent position. For example, a ski instructor might be moved to the position of grounds manager, which is anticipated to work year round. Under the final regulations, in general, if a seasonal employee experiences a change in employment status before the end of the initial measurement period in such a way that, if the employee had begun employment in the new position or status, the employee would not have been a seasonal employee (and would have reasonably been expected to be employed on average at least 30 hours of service per week), the employer has until the first day of the fourth month following the change in employment status, or, if earlier, the first day of the first month following the end of the initial measurement period (plus any applicable administrative period) if the employee averaged 30 hours of service per week or more during the initial measurement period, to treat the employee as a full-time employee.

9. Modification of Measurement Periods or Stability Periods to Consolidate Coverage Entry Dates

Commenters requested that the initial measurement period be modified