Prop. regs. clarify 'play or pay' rules of the Affordable Care Act.

• Author: Toppin, Carlisle F.

Early this year, the IRS issued proposed regulations (REG-138006-12) clarifying the "employer shared responsibility" provisions of Sec. 4980H, added to the Internal Revenue Code by the Patient Protection and Affordable Care Act, P.L. 111-148, as amended (informally known as the "play or pay" rules).

Overview

Beginning on Jan. 1, 2014, large employers that fail to offer minimum essential health care coverage at an affordable cost to substantially all of their full-time employees risk a penalty if one or more of those employees receive a federal subsidy of either a premium tax credit or cost-sharing reduction to purchase coverage for himself or herself through an insurance exchange (Sec. 4980H). This item parses the preceding sentence to briefly highlight key concepts in the proposed regulations.

Determining Large Employer Status

To be considered a large employer, an employer must have employed an average of at least 50 full-time employees (or an equivalent combination of full-time and part-time employees) during the preceding calendar year. Entities that are under common ownership or are otherwise related under Secs. 414(b), (c), (m), and (o) are treated as a single employer for purposes of determining whether they have 50 full-time employees. To determine if the threshold is met, the sum of all full-time employees and full-time equivalents (FTEs) for each calendar month in the preceding year is divided by 12. If the result is 50 or more, the employer is a large employer for the calendar year, unless a. seasonal worker exception applies (Sec. 4980H(c)(2)).

Employees are determined wider common law standards. Leased employees, sole proprietors, partners in a partnership, or 2% S corporation shareholders are not employees for this purpose (Prop. Regs. Sec. 54.4980H-1(a)(13)). Full-time status is assigned to employees who averaged at least 30 hours of service per week (or, if the employer elects, at least 130 hours of service per calendar month) (Prop. Regs. Sec. 54.498014-1(a)(18)). For employees paid on an hourly basis, the employer must calculate their actual hours of service. For nonhourly employees, the employer must count their actual hours or apply an equivalency of eight hours daily or 40 hours weekly, provided the method used does not substantially understate the employees' hours of service in a manner that would cause the employees not to be treated as full time (Prop. Regs. Sec. 54.4980H-3(b)).

FTEs are employees who averaged less...