IRS proposes employer play-or-pay regulations under health care reform.

• Author: Weber, Mindy Tyson

Near the end of 2012, the IRS issued proposed regulations (REG-138006-12) on the employer shared-responsibility provisions under Sec. 4980H, enacted by the Patient Protection and Affordable Care Act, P.L. 111-148 (PPACA), and sometimes referred to as the "play-or-pay" rule. The proposed regulations address many questions that prior IRS guidance had not completely answered and provide important transitional relief.

Key to the implementation of the PPACA are the employer shared-responsibility provisions of Sec. 4980H. Effective in 2014, these provisions require "applicable large employers" to offer their full-time employees (and their dependents) the opportunity to enroll in an employer-sponsored health insurance plan that provides employees with "minimum essential coverage" with "minimum value" at an affordable cost. Employers that fail to provide the required coverage face the prospect of having to make potentially significant payments--called "assessable payments" in the Code, although they function like a penalty.

The PPACA required the IRS, along with the U.S. Department of Labor and the U.S. Department of Health and Human Services, to provide substantial guidance on many of its provisions, including how to determine (1) what are applicable large employers; (2) who is a full-time employee; (3) what "minimum essential coverage" means; (4) how to value the coverage; and (5) when coverage is affordable. In response, the IRS issued a series of notices, including:

1. Notice 2011-36, defining employers and employees;

2. Notice 2011-73, defining affordability;

3. Notice 2012-17, providing guidance on how an employer may classify new employees as either full time or part time, focusing particularly on employees whose status is initially uncertain;

4. Notice 2012-58, further refining earlier guidance and assuring employers that the guidance can be relied on through at least the end of 2014; and

5. Notice 2012-59, regarding the maximum 90-day waiting period for plan entry.

The proposed regulations incorporate and consolidate the guidance in the notices, as well as provide guidance in areas the notices had not addressed. One of the new areas addressed is how an applicable large employer calculates the assessable payment for not offering minimum essential coverage or the assessable payment for offering insurance deemed to be unaffordable, or for not providing minimum value.

The proposed regulations define generally applicable terms at Prop. Regs. Sec. 54.4980H-1; define an applicable large employer at Prop. Regs. Sec. 54.4980H2; provide a methodology for determining full-time employees at Prop. Regs. Sec. 54.4980H-3; and set forth the assessable payment calculations at Prop. Regs. Secs. 54.4980H-4 and 54.4980H-5. The proposed regulations are effective for periods beginning after Dec. 31, 2013, and, as noted in the preamble, can be relied upon by taxpayers pending the issuance of final regulations or other guidance.

As a compilation of prior guidance, the proposed regulations do not provide any particular surprises. However, the preamble indicates the IRS is well aware of many of the schemes some employers have apparently considered as a way around the rules. In this respect, the proposed regulations provide an anti-abuse rule at Prop. Regs. Sec. 54.4980H-3(e) (5) to address practices that have the effect of circumventing or manipulating the application of the employee rehire rules. In addition, the IRS said in the preamble it plans to address in final regulations a shared-employee arrangement whereby an employer co-employs an employee along with a temporary staffing agency, with each purported employer employing the individual for 20 hours a week. The IRS believes the staffing agency would rarely, if ever, be the true employer and that the primary purpose of using such an arrangement would be to avoid the application of Sec. 4980H.

Employers and Employees

The assessable payments under Sec. 4980H apply to "applicable large employers," employers that in the prior calendar year employed on average at least 50...