Relief, Confusion for §4980H(a) Transition Relief

Relief, Confusion Associated with §4980H(a) Transition Relief

Treasury included several transition relief provisions when it released the Shared Responsibility final regulations last week.  The transition relief created new strategies for employers in 2015 (and for non-calendar year plans certain months in 2016) which are helpful particularly when the transition relief provisions are utilized together.  However, the transition relief provisions leave some unanswered questions particularly the transition relief surrounding the §4980H(a) penalty.

The transition relief that has garnered a majority of the attention since the Shared Responsibility final regulations were released is the “Fewer than 100 Full-Time Employees” transition relief.  So long as three conditions are met, an employer who has less than 100 full-time employees (including full-time equivalent employees (FTEs)) on business days during 2014 will not be assessed a penalty under §4980H(a) or §4980H(b) in 2015.  For the “Fewer than 100 Full-Time Employees” transition relief to apply an employer must certify that it meets the following three conditions:
  1. the employer must average at least 50 full-time employees (including FTEs) but fewer than 100 full-time employees (including FTEs) in 2014;
  2. from February 9, 2014 thru December 31, 2014 the employer cannot reduce its workforce or its workforce’s hours of service to meet the condition of having fewer than 100 full-time employees (including FTEs) in 2014 (there is an exception for a bona fide business reason); and
  3. the employer must maintain and not materially reduce the health coverage the employer offered as of February 9, 2014 until the last day of the 2015 plan year.
If the three conditions above are satisfied an employer will not have a §4980H(a) or a §4980H(b) penalty assessed in 2015.  The “Fewer than 100 Full-Time Employees” transition relief is helpful although it is conditioned on employers not taking certain actions and having fewer than 100 full-time employees (including FTEs).

Transition relief was also provided in the Shared Responsibility final regulations by altering the calculation of the §4980H(a) penalty for 2015.  The transition relief allows an applicable large employer with at least 100 full-time employees (including FTEs) to reduce its number of full-time employees by 80 instead of 30 when calculating the §4980H(a) penalty.  The §4980H(a) transition relief reduces the penalty associated with §4980H(a) by $100,000 in 2015.  Knowledgeable employers, particularly those employers who have not offered coverage in the past, will recalculate their Play or Pay decision for 2015 based on the changed §4980H(a) formula.

For example, an employer with 300 full-time employees would be liable for a §4980H(a) penalty of $440,000 in 2015 (compared to $540,000 without the transition relief) if no coverage was offered.  What it would cost to avoid a §4980H(a) penalty is what an employer should be comparing the $440,000 §4980H(a) penalty against when making the Play or Pay decision.  To make an informed Play or Pay decision an employer should  consider things such as, but not limited to: (1) the average cost to cover each participating employee; (2) the participation rate of employees if coverage is offered (keeping in mind automatic enrollment rules could apply by 2015); (3) tax deductions an employer could utilize if an employer offers coverage; (4) talent and retention issues for the employer’s workforce; and (5) the use of the 95 percent rule (the 70 percent rule in 2015) along with any §4980H(b) risks associated with the use of the 95 percent rule (the 70 percent rule in 2015).  There are many more factors an employer should consider when making its Play or Pay decision and each employer’s workforce demographics will dictate the best strategy for each employer.  What the transition relief for 2015 does is change the number associated with the §4980H(a) penalty which is what an employer should be weighing and calculating all of these factors against.

As a result of the §4980H(a) transition relief any applicable large employer with at least 100 full-time employees (including FTEs) in 2014, but 80 or fewer full-time employees for each month in 2015, will not have to worry about the penalties under §4980H(a) or §4980H(b).  If an employer has 80 or fewer full-time employees for each month in 2015, the employer’s §4980H(a) penalty in 2015 will be $0.  As a result of the §4980H(b) penalty being capped by the amount of the §4980H(a) penalty, the §4980H(b) penalty will also be $0.

Under the §4980H(a) transition relief an employer can even manipulate its way down to 80 or fewer full-time employees in 2015 so long as the employer has 100 or more full-time employees (including FTEs) in 2014.  What is unclear is what §4980H(a) penalty formula is used if an employer fails the second and/or third condition of the “Fewer than 100 Full-Time Employees” transition relief.  In the preamble, both the heading that describes the §4980H(a) transition relief and the actual description require 100 or more full-time employees (including FTEs) to qualify for the §4980H(a) transition relief.

The unanswered question is whether an employer who fails the second and/or third condition of the “Fewer than 100 Full-Time Employees” transition relief rule is subject to the original §4980H(a) penalty which only allows an employer to reduce its full-time employee amount by 30 not 80.  This would be an extremely harsh rule as it would increase an employer’s §4980H(a) penalty by $100,000.  Maybe the government wanted to create this harsh penalty to prevent manipulation, but it is odd a similar penalty would not be enforced against an employer who still has 100 full-time employees (including FTEs).  I am skeptical Treasury intended to create this discrepancy.

Consider two simple examples that illustrate the point.  Employer A has 110 full-time employees (including FTEs) in 2014.  In each calendar month in 2015 employer A only has 80 full-time employees.  In the past employer A has offered health coverage that would satisfy the affordability and minimum value standards of the ACA.  However, employer A has come on hard times and decides to no longer offer health coverage to its employees beginning in January of 2015.  The transition relief for the §4980H(a) penalty would result in no payment under §4980H(a) or §4980H(b) for employer A in 2015.

Employer B has all of the same characteristics as employer A, except it only has 90 full-time employees (including FTEs) in 2014.  Like employer A, employer B only has 80 full-time employees for each calendar month in 2015.  In the past employer B has offered health coverage that would satisfy the affordability and minimum value standards of the ACA.  However, employer B has come on hard times and decides to no longer offer health coverage to its employees beginning in January of 2015.  Employer B would not be able to use the “Fewer than 100 Full-Time Employees” transition relief because it does not meet condition three as the employer B does not maintain the coverage it previously offered as of February 9, 2014.  If Treasury applies the original §4980H(a) penalty of $2,000 times the number of full-time employees minus 30, employer A will be liable for a §4980H(a) penalty of $100,000 ($2,000 * (80 – 30) = $100,000).  Employer B, a smaller employer, will be penalized $100,000 for taking the exact same action as employer A simply because employer B has less than 100 full-time employees (including FTEs) in 2014.

Treasury should clarify if this is an intentional discrepancy.  If no action is taken by Treasury, an odd result will occur that gives larger employers (those with 100 or more full-time employees (including FTEs)) more planning opportunities.  Regardless, employers need to assess their Play or Pay decision for 2015 in light of the new transition guidance issued by the Shared Responsibility final regulations.Legal Consent

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