ABA Tax Section Offers Suggestions on Proposed Employer Shared Responsibility Regs

Enclosed are comments on the proposed regulations issued under Section 4980H. These comments represent the view of the American Bar Association Section of Taxation. They have not been approved by the Board of Governors or the House of Delegates of the American Bar Association, and should not be construed as representing the policy of the American Bar Association.

Principal responsibility for preparing these comments was exercised by Linda R. Mendel of the Section's Employee Benefits Committee (the "Committee"). Substantive contributions were made by Jacquelyn Abbott, Sarah Downie, William Freedman, Evelyn Haralampu, Sarah Krause, Norbert Kugele, Thomas Nichols, Andrew Oringer, Fritz Richter, Laura Westfall and Matthew J. Eickman. These Comments were reviewed by W. Waldan Lloyd, a Vice Chair of the Committee, and Mark A. Bodron, Chair of the Committee. The Comments were further reviewed by Roberta Casper Watson and James R. Raborn on behalf of the Section's Committee on Government Submissions and by Pamela Baker, Council Director for the Committee.

Although the members of the Section of Taxation who participated in preparing these Comments have clients who might be affected by the federal income tax principles addressed by these Comments, no such member or the firm or organization to which such member belongs has been engaged by a client to make a government submission with respect to, or otherwise to influence the development or outcome of, the specific subject matter of these Comments.

                               CONTENTS

On December 28, 2012, the Department of Treasury ("Treasury") and the Internal Revenue Service (the "Service") issued proposed regulations ("Proposed Regulations")¹ under section 4980H,² which addresses the employer shared responsibility requirements regarding health coverage.

Section 4980H was added by section 1513 of the Patient Protection and Affordable Care Act of 2010 (the "Affordable Care Act" or "Act").³ In general, section 4980H provides that an "applicable large employer" is subject to an assessable payment in either of two situations: (1) the employer fails to offer to its full-time employees (and their dependents) minimum essential coverage or "MEC"⁴ under an eligible employer-sponsored plan ("employer plan"), and a full-time employee is certified to the employer as having received an applicable premium tax credit or cost-sharing reduction; or (2) the employer offers its full-time employees (and their dependents) an employer plan with MEC, and one or more full-time employees is certified to the employer as having received an applicable premium tax credit or cost-sharing reduction because, with respect to such employee or employees, the employer's coverage is either unaffordable or does not provide minimum value within the meaning of section 36B(c)(2)(C)(i) and (ii). Section 4980H is effective for months beginning on and after January 1, 2014.

The Proposed Regulations provide guidance and clarification with respect to a number of issues related to the application and operation of section 4980H, including, but not limited to, rules for determining whether an employer is an applicable large employer (and thus subject to section 4980H), who is a fulltime employee, and how the assessable payments are determined. We appreciate Treasury's and the Service's efforts to provide comprehensive guidance regarding the application of section 4980H. In response to the invitation in the preamble to the Proposed Regulations, we appreciate the opportunity to provide these Comments regarding the Proposed Regulations.

A summary of our recommendations for the Regulations, when finalized, are as follows:

With regard to applicable large employer status:

• We recommend that (i) when an applicable large employer sells the stock of a member, the former member be treated as a new employer under section 4980H(c)(2)(C)(ii), and (ii) after the sale, the applicable large employer not be treated as the predecessor of a former member.

• We recommend that when an applicable large employer acquires the stock of a small employer, the applicable large employer be permitted to treat the employees of the small employer as new employees.

• We recommend that a full-time employee be treated as having been offered minimum essential coverage by his or her employer if any applicable large employer member offers minimum essential coverage to the full-time employee.

• We recommend that (i) when an employee is classified as full-time as a result of hours of service for two or more applicable large employer members, the applicable large employer be permitted to select one applicable large employer member that will treat the employee as its full-time employee, and (ii) the selected applicable large employer member report an employee as its full-time employee under section 6056 and be responsible for payment of any penalties imposed under section 4980H with respect to the employee.

• Because the common law employer test can result in ambiguous situations, including situations where a temporary worker is the common law employee of two different employers, we recommend the addition of the following safe harbor rule: if the entity that reports a worker's salary or wages on Form W-2 (e.g., a staffing agency) offers a worker affordable health care coverage with minimum value, but that entity is subsequently determined by the Service not to be the common law employer of the worker, then the entity that is the common law employer of the worker will not be subject to an assessable payment under section 4980H with respect to such worker.

• We recommend that an applicable large employer be permitted to treat an employee as a seasonal employee if, as of the date of hire, the employer has a reasonable expectation that the employee will work for a defined period that is less than a specified time limit, as follows:

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  (i) nine months, if other employees performing similar work with the same (or a similar) employer are classified as full-time or variable hour (i.e., other than seasonal); or

  (ii) in all other cases, seven months.

• We recommend that, when a variable hour employee is rehired after a period of at least 26 weeks during which no hours are credited, an applicable large employer member be permitted to choose whether to treat the employee as a new employee or an ongoing employee.

• We believe that aspects of the Department of Labor's definition of "hour of service" in Department of Labor regulation section 2530.200b-2 should not apply to the full-time status safe harbor, especially in light of the Service's decision not to cap the number of hours of service that must be credited during a period of time during which no duties are performed, and therefore recommend that:

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  (i) no hours of service be credited for any period after the employment relationship is terminated; and

  (ii) amounts payable by a third party sick pay payor should not be treated as paid by the employer.

• We recommend that the reasonable classification test be expanded to include other potential methods for classifying employees, as well as including a catch-all category of "any other reasonable classification of employees."

• We recommend that the definition of minimum essential coverage be clarified to provide that the offer to enroll in MEC does not have to include dependents who are not "applicable individuals" under section 5000A(d)(3), such as a non-resident dependent.

• We recommend that the definition of "dependents" be clarified to provide that an employee's "dependent" for purposes of section 4980H is "a child (as defined in section 152(f)(1)(A)(i)) of an employee who has not yet attained age 26." This would result in limiting "dependents" for purposes of section 4980H to an employee's son, daughter, stepson, or stepdaughter (including an adopted child and a child legally placed for adoption), who has not yet attained age 26, and would clearly exclude a foster child from this definition.

• We recommend that affordability be determined after the application of any premium discount available under an employer's wellness program that may be applied to the employee contribution for self-only coverage for the lowest cost option offered by the employer that provides minimum essential coverage and minimum value, provided that the premium discount available under the employer's wellness program complies with applicable nondiscrimination and wellness program requirements under the Health Insurance Portability and Accountability Act of 1996⁵ and the Affordable Care Act.

• We recommend that an employee who takes a leave of absence for illness, injury, or disability and who receives less than his or her hourly wage or salary during that leave of absence not be treated as having experienced a reduction in hourly wage or salary for purposes of the Rate of Pay Safe Harbor.

• We recommend that the definition of "month" be slightly rephrased so that it applies to the "period that begins on any date other than the first day of a calendar month and that ends on the immediately preceding date in the immediately following calendar month (or on the last day of February if there is no such immediately preceding date)."

• We recommend that the word "member" be added to the phrase "applicable large employer [member]" in the third line of the last sentence of section 54.4980H-5(a) of the Proposed Regulations.

• We recommend that the words "for the entire month" and "entire" be added to the phrase "if the employee would have been offered coverage [for the entire month] if the employee had been employed for the entire month, the employee is treated as having been offered coverage during that [entire] month" in the last sentence of section 54.4980H-5(c) of the Proposed Regulations.

Instead of treating an applicable large employer as the predecessor of a former member, we recommend that a former member be treated as a new employer. An entity ceases to be a member of a controlled group of corporations or trades or businesses under common control due to a sale of its stock or other ownership interests. As a new employer, its status as an applicable large employer (or a small employer) would be based on "the average number of employees that it is reasonably expected such employer will employ on business days in the current calendar year."¹⁰ We recommend that only days in the calendar year after the termination of the relationship to the controlled group or trades or business under common control be considered for this purpose.

When an applicable large employer hires the former employees of a small employer in connection with the purchase of assets of a small employer, the applicable large employer will treat the former employees of the small employer as its newly hired employees. Our recommendation would provide equivalent treatment for employees of a small employer in connection with an applicable large employer's purchase of stock in a small employer.

III. Allocation of responsibility among applicable large employer members

Within a controlled group of corporations, an employee of one member of the controlled group could, under some circumstances, be the common law employee of another member of the controlled group. The common law employer member should not be subject to an assessable payment under section 4980H(a) where an affiliated member has offered minimum essential coverage to the employee. Sharing of employees through intercompany service agreements would be impacted if this were not allowed. In addition, enforcement of the common law employment standard within a multi-member applicable large employer would require the Service to review and analyze an applicable large employer's business motives (such as business strategy and initiatives) for employee assignments and transfers, an exercise that would be unduly burdensome for both the Service and the applicable large employer member.

In general, the Affordable Care Act is intended to influence the behavior of employers as it relates to the goal of providing its employees with affordable and accessible health coverage. We do not believe that the Act is intended to impede the ability of private or public employers to direct the activities and location of their employees. To this end, we recommend that an applicable large employer have the freedom to assign and transfer employees to members of its controlled group as it sees fit, subject to its corporate governance documents and business needs. The movement of employees is commonplace today and often essential to an employer's business in order to make sure that the right people are in the right place at the right time.

We believe that Example 1 in section 54.4980H-2(d) of the Proposed Regulations, where P owns 100% of all classes of stock of Corporations S and T, could be expanded as follows to illustrate the point:

IV. Identification of full-time employees

To determine who is the common law employer, courts use a common law test adopted by the U.S. Supreme Court in Nationwide Mutual Insurance Co. v. Darden.¹⁸ As explained by the Ninth Circuit court in Vizcaino v. Microsoft,¹⁹Darden applied the common law of agency, and under these common law principles it is possible that a temporary worker could be the common law employee of both the staffing agency and a service recipient company.²⁰ Since no one Darden factor is the most important, the outcome is dependent to some degree on a subjective balancing of the factors. In many situations, reasonable minds could reach different conclusions as to who is a common law employer, and even over whether both the service recipient and the staffing agency are common law employers of the same worker.

The possibility that both the staffing agency and the service recipient company could be common law employers of the worker raises the possibility that both the staffing agency and the service recipient company may be subject to penalties under section 54.4980H-4 of the Proposed Regulations for failure to offer coverage to a worker -- including the possibility that one could be penalized even though the other is offering coverage.

For example, suppose that Company A has 100 full-time employees, including six temporary workers obtained from Staffing Agency B who have been with Company A for more than 90 days. Company A offers coverage to 93 of its employees. Company A fails to offer coverage to seven of its employees, including the six temporary workers obtained through Staffing Agency B. However, Staffing Agency B offers affordable minimum essential coverage to Company A's six temporary workers. The seventh employee qualifies for subsidized coverage through an exchange. Because in this example Company A is not offering coverage to at least 95% of its full-time employees (and their dependents), Company A is subject to an assessable payment under section 54.4980H-4 of the Proposed Regulations -- even though these temporary workers are being offered minimum essential coverage by Staffing Agency B.

A significant goal of the Affordable Care Act is to expand the number of individuals who are able to obtain health plan coverage. With respect to temporary workers, this goal is met as long as either the service recipient company or the staffing agency is offering minimum essential coverage to the temporary workers.

We recommend that the Regulations, when finalized, establish a rule that will not penalize the service recipient company if the staffing agency offers affordable minimum essential coverage to a worker. Given the ambiguity inherent in using the Darden factors, we recommend that this rule apply even if the Service were to later determine that the staffing agency was not a common law employer of the worker. As long as the staffing agency offers affordable minimum essential coverage to the worker, the service recipient company will be deemed to have satisfied the employer responsibility requirements under section 4980H. Conversely, if neither the service recipient company nor the staffing agency offers the worker affordable minimal essential coverage, then the common law employer remains responsible for penalties. We believe that a rule for staffing agencies is consistent with and supports the Act's goal of expanding the number of individuals who are provided affordable health care coverage.

Under the Proposed Regulations, an applicable large employer is not permitted to take into account the likelihood that a variable hour employee will terminate employment before the end of his or her initial measurement period.²⁵ However, as noted in the preamble to the Proposed Regulations, this rule does not apply to seasonal employees.²⁶ We believe that, if an employee is hired with the expectation that he or she would work for a defined period not in excess of the specified time limit, the employer should be permitted (i) to classify the employee as seasonal and (ii) to take into account the likelihood that the employee's employment will terminate at the end of the defined period.

As referenced in Notice 2012-58²⁷ and noted in the preamble to the Proposed Regulations,²⁸ section 105 provides a standard for defining seasonal employees. In testing a self-insured health plan for discrimination under section 105(h), the following employees may be excluded:

We believe the rule under section 105(h) could be modified for use under section 4980H to provide that a seasonal employee is an employee that the employer reasonably expects will work for a defined period that is less than:

Classification as a seasonal employee is only relevant to an individual who is a new employee. It is based on the expectation that the employee's employment will end during a specified period. If a seasonal employee terminates employment and is subsequently rehired within 26 weeks, he or she would be treated as an ongoing employee.³⁰ Due to this break in service rule, a seasonal employee who: (i) is hired each year on June 15; (ii) works 35 hours per week for a period of just under seven months (for a total of 1,062 hours); and (iii) then terminates employment on December 13, would be treated the same as a variable hour employee who works 1,062 hours (an average of 20.4 hours per week) during a 12-month measurement period.

Section 54.4980H-3(e)(1) of the Proposed Regulations addresses the circumstances under which an applicable large employer member may treat a rehired variable hour employee as a new employee for purposes of the Full-Time Status Safe Harbor. Generally, a variable hour employee rehired after a period of at least 26 weeks during which no hours are credited may be treated as a new employee.

The Service rejected a 160-hour limit on the number of hours of service that must be credited for periods during which no services are performed and instead decided that all periods of paid leave must be taken into account.³⁴

We recommend that amounts payable by a third party sick pay payor (such disability benefits payable by an insurer) not be deemed to be paid by an employer. This would simplify post-year end data matching. Amounts payable by a third party sick pay payor may be reported on a Form W-2 filed by either the third party sick pay payor or the employer, depending on the contractual arrangements between the parties. However, in many cases the employer may not have access to the payment information (e.g., amount paid, applicable time period, etc.) when disability pay or sick pay is provided by the third party insurer. Also, regardless of which party files the Form W-2, the payments are designated in Box 13 of Form W-2 as third party sick pay. Excluding all third party sick pay from the calculation of hours of service would provide consistent and administrable treatment for disability benefits and other amounts not actually paid by the employer to the employee.

V. Dependents

Section 5000A(d) enumerates the classes of individuals who are excluded from the definition of "applicable individual." Section 5000(d)(3) excludes "an individual for any month if for the month the individual is not a citizen or national of the United States or an alien lawfully present in the United States."

An employee of a foreign affiliate of an applicable large employer who is assigned to work for an applicable large employer member in the United States becomes an inpatriate. An inpatriate's family may or may not accompany the inpatriate to the United States. If members of the inpatriate's family become United States residents, the family members would be offered coverage in the United States group health plan. However, if the inpatriate's family remains in the inpatriate's home country, it would be administratively difficult, expensive, and presumably unnecessary to offer coverage in a United States group health plan to individuals who are neither United States citizens nor United States residents.

Moreover, we would expect that whatever arrangements an inpatriate (who in many cases will be an executive) has made for the health care of family members (be it through a governmental program, insurance, or otherwise) in his or her home country would remain in place for family members who do not accompany the inpatriate on his or her assignment in the United States. Further, the non-resident dependents would not be eligible for premium assistance under section 36B so the cost of their health care would not be shifted to the United States government in the absence of coverage from the applicable large employer member in the United States.³⁸ For these reasons, we believe that an applicable large employer member should not be potentially subject to the assessable payment for failing to offer coverage to dependents who are not "applicable individuals" under section 5000A(d)(3).

For example, assume French foreign Company F is an affiliate of United States Company S (an applicable large employer). Company F seconds Employee FS to Company S, which has 100 full-time employees, including Employee FS who is a common law employee of Company S with U.S. source income. Employee FS has left his family in France. Company S offers Employee FS the opportunity to enroll in MEC under its employer plan. However, Company S does not offer coverage to the children of Employee FS as they are neither citizens nor legal residents of the United States. Furthermore, Company S fails to offer coverage to five of its full-time employees and one of those employees obtains coverage from the exchange and receives the premium tax credit. Company S receives a 1411 Certification related to that employee. The status of Employee FS would in such a case determine the assessable payment imposed on Company S.

The Proposed Regulations provide that an applicable large employer is treated as having offered an employer plan with MEC to all of its full time employees (and their dependents) if, for a particular month, such coverage is offered to all but the greater of 5% or five of its full time employees.³⁹ Thus, if the failure to offer coverage to the foreign dependents of Employee FS is treated as a failure to offer coverage to Employee FS, then Company S would have failed to offer coverage to six full time employees (and thus greater than 5%) and its assessable payment would be $140,000.⁴⁰

However, if the failure to offer coverage to the foreign dependents of Employee FS is not treated as a failure to offer coverage to Employee FS, then Company S would have failed to offer coverage to only five employees. In that case, Company S would not be subject to the assessable payment under section 4980H(a) because it offered coverage to all but five of its employees (and thus equal to 5% of its full time employees). However, Company S would be subject to an assessable payment of $3,000 under section 4980H(b) as a result of one employee's receipt of the premium tax credit.

First, the rule in the Proposed Regulations that would include foster children in the class of "dependents" that must be offered MEC under an employer plan in order to avoid the assessment of a penalty does not reflect, in our experience, the dependent coverage currently offered by the majority of private U.S. employers. Although official statistics are not available regarding the actual percentage of private employer plan sponsors that currently make coverage available to their employees' foster children, it has been our experience that offering such coverage would be highly unusual. In most instances, plan sponsors that offer dependent child coverage make such coverage available to biological and adopted children of their employees, as well as step-children of their employees, but do not extend eligibility for coverage to foster children living with their employees. A requirement that foster children be eligible as "dependents" for coverage under employer-sponsored plans would thus be inconsistent with our understanding of present practice.

Second, we note that the inclusion of foster children in the definition of "dependents" for purposes of section 4980H would represent a significant departure from the Code's existing deference to the plan's definition of "child" for purposes of establishing eligibility for employer-provided benefits. With a single exception, the sections of the Code that address income taxes, Subtitle A (Income Taxes), that incorporate the term "child," as defined in section 152(f)(1), are designed to allow a deduction for certain expenses incurred, or an exclusion for certain amounts reimbursed, in connection with such child.⁴² Several of those sections incorporate the term "child" (as defined in section 152(f)(1)) by reference for purposes of determining the taxability of benefits received by dependents covered by an employer-sponsored plan. However, none of the sections in Subtitle A that incorporate the term "child" (as defined in section 152(f)(1)) by reference override the underlying plan's eligibility rules: in fact, such sections would be applicable only after an individual becomes eligible for coverage pursuant to a plan's eligibility rules, becomes covered by the plan, and actually receives a benefit under such plan. This deference extends to related Federal statutes that incorporate the term "child" (as defined in section 152(f)(1)). For example, under section 2714 of the Public Health Service Act,⁴³ if a group health plan or insurer offers dependent coverage to categories of children listed in section 152(f)(1), the plan makes such coverage available to such children to age 26.⁴⁴ In contrast, the definition of "dependent" in the Proposed Regulations effectively supersedes an underlying plan's definition of "child," meaning that the plan sponsor will need to amend the plan's eligibility requirements to offer coverage to all individuals meeting the Proposed Regulations' definition of "dependent," in order to avoid the assessment of a penalty under section 4980H.

Third, by including foster children in the class of "dependents" for purposes of section 4980H, plan sponsors would likely be required to offer Consolidated Omnibus Budget Reconciliation Act of 1985⁴⁵ ("COBRA") continuation coverage under section 4980B to such foster children as "qualified beneficiaries." Unlike Subtitle A, the sections of the Code that address excise taxes, Subtitle D of the Code (Miscellaneous Excise Taxes), does not include a definition of the term "dependent," nor does it incorporate the defined term "child" by reference. As such, COBRA does not define the term "dependent child" for purposes of determining whether a child can be a "qualified beneficiary" for purposes of eligibility for COBRA; instead, identification of "dependent children" is determined by the terms of the group health plan. The requirement in the Proposed Regulations that the terms of an employer-sponsored plan offer minimum essential coverage to foster children of its employees would therefore, in effect, expand the category of "qualified beneficiaries" to whom COBRA is required to be offered. The practical administration by a plan sponsor of such an expansion would likely be extremely difficult. For example, who would have the right to elect COBRA on a foster child's behalf--the employee (who would likely no longer have a foster parent relationship to the child if such foster child was placed in another living situation), the state (as the child's temporary guardian), or another party? In addition, given the fact that many foster placements are relatively short, simply keeping track of the eligibility of such foster children for COBRA would be an undue administrative burden.

Finally, and more generally, we understand that a significant goal of the Affordable Care Act is to expand the number of individuals who are able to obtain health plan coverage. However, requiring foster children to be included in the class of "dependents" that must be offered minimum essential coverage under an eligible employer-sponsored plan in order to avoid the assessment of a penalty does not advance this goal, as foster children are already currently eligible for medical coverage under existing state and governmental programs, such as Medicaid. Thus, as a policy matter, foster children will continue to be able to obtain health plan coverage, whether or not employer-sponsored plans are required to offer minimum essential coverage to such foster children pursuant to regulations under section 4980H. However, any requirement under the Proposed Regulations that plan sponsors be required to offer minimum essential coverage to foster children of employees in order to avoid assessable penalties may raise substantial and complex coordination of benefits issues, if a foster child is placed with an employee by a state or other governmental agency and the child also has coverage under a state or governmental program such as Medicaid.

VI. Affordability

Under the Form W-2 Safe Harbor, the required employee contribution for self-only coverage for the lowest cost option that provides minimum essential coverage and minimum value must not exceed 9.5% of the employee's Form W-2 wages for that calendar year.⁴⁷ If an employee was not a full-time employee for the entire calendar year, the Proposed Regulations provide that Form W-2 wages may be adjusted to reflect the period with respect to which the employee was offered coverage.

Under the Rate of Pay Safe Harbor, the required employee contribution for self-only coverage for the lowest cost option that provides minimum essential coverage and minimum value must not exceed 9.5% of an amount equal to 130 hours multiplied by the employee's hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year) for an hourly employee and an amount equal to the monthly salary of the employee for a salaried employee.⁴⁸

The Health Insurance Portability and Accountability Act of 1996⁴⁹ ("HIPAA") and the Affordable Care Act allow an employer to offer health plan premium discounts under a wellness program if such program adheres to certain conditions. However, section 54.4980H-5 of the Proposed Regulations does not indicate how the affordability determination and the affordability safe harbors are affected by a premium discount provided in connection with a wellness program.⁵⁰

The recommended approach under the Proposed Regulations would align the affordability determination with the true cost to an employee of self-only coverage. Provided that an employee satisfies applicable eligibility criteria for a wellness program's premium discount(s), the employee may elect to purchase coverage by paying the premium less the premium discount. When an employee receives a premium discount, the employer pays the portion of the premium that otherwise would have been paid by the employee. Accordingly, if a premium discount is not taken into account for the affordability determination, the employer could lose a benefit associated with increasing its subsidy of the health plan premium.

Although employees may be required to satisfy eligibility criteria to receive a premium discount, the nondiscrimination and wellness program requirements under HIPAA and the Affordable Care Act ensure that a premium discount available under a wellness program is reasonably designed to be available to all similarly situated individuals. Specifically, if a wellness program requires employees to satisfy a standard related to a health factor in order to receive a premium discount, the wellness program must offer a reasonable alternative means of qualifying for the premium discount to individuals whose medical conditions make it unreasonably difficult, or for whom it is medically inadvisable, to meet the specified health-related standard. If a wellness program complies with the applicable nondiscrimination and wellness program requirements under HIPAA and the Affordable Care Act with respect to an employee, then a premium discount under the wellness program is reasonably available to the employee and should be taken into account in determining whether the premium is affordable to the employee regardless of whether the employee actually satisfies the criteria to actually receive the premium discount.

Finally, by allowing an employer to take into account all available premium discounts in the affordability determination, the recommended approach allows the employer to use a single dollar amount as the employee contribution for all similarly situated employees who may satisfy the eligibility criteria to receive the premium discount(s). This means an employer would not have the administrative burden of determining which employee contribution amount should be used for an individual employee's affordability determination depending on whether that employee actually satisfied the applicable eligibility criteria to receive the premium discount(s).

Many employers provide paid leave to employees who cannot work due to illness, injury, or disability. These sick leave benefits may be less than the full hourly wages or salary that an employee would have received had he or she been working. Therefore, we believe it is appropriate for the Service to clarify that the receipt of sick leave benefits during a leave of absence should not be treated as a reduction in an employee's rate or pay or salary. To do otherwise would put an applicable large employer member that provides sick leave benefits in a worse position than an applicable large employer member that provides only unpaid sick leave. Over time, this could have a negative impact on the length and/or availability of sick leave benefits. For that reason, we recommend that an employee who takes a leave of absence for illness, injury, or disability and who receives less than his or her hourly wage or salary during that leave of absence not be treated as having experienced a reduction in hourly wage or salary.

VII. Requested clarifications

In this regard, we recommend that the language of section 54.4980H-3(d)(1) of the Proposed Regulations be clarified by inserting the word "calendar" in the phrase "the first day of the fourth [calendar] month" in the sixth line of that section. It appears that the term "calendar month" was intended, rather than "month" as defined in the above section.

We recommend that the words "for the entire month" and "entire" should be added to the phrase "if the employee would have been offered coverage [for the entire month] if the employee had been employed for the entire month, the employee is treated as having been offered coverage during that [entire] month" in the last sentence of section 54.4980H-5(c) of the Proposed Regulations.

The second set of proposed changes merely conforms the language of section 54.4980H-5(c) of the Proposed Regulations to the corresponding language of section 54.4980H-4(c) of the Proposed Regulations.

No substantive change is intended by either of these recommendations.

² References to a "section" are to a section of the Internal Revenue Code of 1986, as amended (the "Code"), unless otherwise indicated.

³ The Act was enacted March 23, 2010, Pub. L. No. 111-148, 124 Stat. 119, and amended by section 1003 of the Health Care and Education Reconciliation Act of 2010, enacted March 30, 2010, Pub. L. No. 111-152, 124 Stat. 1029, and further amended by the Department of Defense and Full-Year Continuing Appropriations Act, 2011, Pub. L. No. 112-10, 125 Stat. 38.

⁴ MEC is defined in section 5000A(f).

⁵ Pub. L. No. 104-191, 100 Stat. 2548.

⁶ The term "applicable large employer" is defined under section 4980H(c)(2).

⁷ Prop. Reg. § 54.4980H-1(a)(31).

⁸ 78 Fed. Reg. 217, 222 (2013).

⁹ A "qualified employer" (i.e., an employer permitted to purchase coverage on a SHOP Exchange) is a small employer that elects to make all full-time employees eligible for one or more qualified health plans offered on a SHOP Exchange. 45 CFR § 155.710. "Large employer" and "small employer" are defined by reference to section 4890H(c)(2), effective for plan years beginning on or after January 1, 2016. 45 CFR § 155.20 (except for operations of a Federally-facilitated SHOP for which the method shall be used for plan years beginning on or after January 1, 2014 and in connection with open enrollment activities beginning October 1, 2013).

¹⁰ I.R.C. § 4980H(c)(2)(C)(ii).

¹¹ Prop. Reg. § 54.4980H-1(a)(35) ("The term Section 1411 Certification means the certification received as part of the process established by the Secretary of Health and Human Services under which an employee is certified to the employer under section 1411 of the Affordable Care Act as having enrolled for a calendar month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.").

¹² Prop. Reg. § 54.4980H-4(a).

¹³ Prop. Reg. § 54.4980H-1(a)(14).

¹⁴ Prop. Reg. § 54.4980H-4(d), which provides in part that "[i]f an applicable large employer member's total allocation is a fractional number that is less than one, it will be rounded up to one."

¹⁵ Prop. Reg. § 54.4980H-1(a)(21)(ii).

¹⁶ Prop. Reg. § 54.4980H-4(a).

¹⁷ Prop. Reg. § 54.4980H-1(a)(13) & (14).

¹⁸ 503 U.S. 318 (1992).

¹⁹ 173 F.3d 713, 723-24 (9^th Cir. 1999).

²⁰See also Arrow Electronics v. Adecco Employment Services, Inc. 195 S.W.3d 646 (Tenn. Ct. App. 2005) (relying on loaned servant doctrine to allocate liability between the two employers of a temporary worker).

²¹ Prop. Reg. § 54.4980H-3(c)(3)(i).

²² Prop. Reg. § 54.4980H-1(a)(43) (a variable hour employee means an "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 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.").

²³ Prop. Reg. § 54.4980H-1(a)(33).

²⁴ Prop. Reg. § 54.4980H-3(c)(2).

²⁵ Prop. Reg. § 54.4980H-1(a)(43).

²⁶ 78 Fed. Reg. 218, 227 (2013) ("Effective as of January 1, 2015, and except in the case of seasonal employees, the employer will be required to assume for this purpose that although the employee's hours of service might be expected to vary, the employee will continue to be employed by the employer for the entire initial measurement period; accordingly, the employer will not be permitted to take into account the likelihood that the employee's employment will terminate before the end of the initial measurement period.") (emphasis added).

²⁷ 2012-41 I.R.B. 436. Notice 2012-58 describes possible safe harbor methods that may be used by employers to determine which of their employees should be classified as "full-time employees" for purposes of section 4980H.

²⁸ 78 Fed. Reg. 218, 227 (2013).

²⁹ Reg. § 1.105-11(c)(2)(iii)(C).

³⁰ Prop. Reg. § 54.4980H-3(e)(1).

³¹ Prop. Reg. § 54.4980H-3(c)(3).

³² Prop. Reg. § 54.5980H-3(c)(1).

³³ 29 CFR § 2530.200b-2(a)(2) (emphasis added).

³⁴ 78 Fed. Reg. 218, 223 (2013).

³⁵ 29 CFR § 2530.200b-2.

³⁶See, e.g., I.R.C. § 410(b)(2)(A)(i) (permitting nondiscriminatory employer classifications for purposes of discrimination testing) and I.R.C. § 132(j)(1) (same).

³⁷ Thus, such children are not qualifying children (or qualifying relatives) under section 152 for purposes of the dependency exemption and other tax benefits.

³⁸ Act § 1412(d).

³⁹ Prop. Reg. § 54.4980H-4(a).

⁴⁰ The penalty under section 4980H(a) would be [100 - 30] x $2,000 = $140,000 on an annual basis.

⁴¹ Prop. Reg. § 54.4980H-1(a)(11).

⁴² The sections in Subtitle A of the Code that incorporate the term "child" as defined in section 152(f)(1) are as follows: (i) section 21(e)(6)(B), expenses reimbursable for household and dependent care services necessary for gainful employment are not excludible if expenses are paid to a "child" of the taxpayer who has not attained age 19 at the end of the taxable year; (ii) section 72(t)(7)(A)(iii), exception for 10% early distribution penalty for distributions from individual retirement plans for qualified higher education expenses for education furnished to a "child" of the taxpayer; (iii) section 105(b), exclusion from gross income of amounts reimbursed to taxpayer for expenses incurred by taxpayer for medical care of taxpayer's "child"; (iv) section 129(c)(2), expenses reimbursable for dependent care assistance program are not reimbursable if payment is made to a "child" of the taxpayer who has not attained age 19 at the end of the taxable year; (v) section 132(h)(2)(B), exclusion from gross income for certain fringe benefits provided to certain "children" of a taxpayer; (vi) section 162(l)(1)(D), deduction from income for amounts paid for medical care insurance for a self-employed taxpayer's "child" who has not attained age 27 at the end of the taxable year; (vii) section 401(h), pension plans allowed to provide for payment of benefits for sickness, accident, hospitalization, and medical expenses of retired employees, their spouses and their dependents (including any "child" of the retired employee who has not attained age 27 at the end of the taxable year); (viii) section 501(c)(9), organizations exempt from taxation under Subtitle I of the Code include voluntary employees' beneficiary associations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents (including a member's "child" who has not attained age 27 at the end of the taxable year); and (ix) section 1361(c)(1)(C), a foster child is counted as a "child" for purposes of determining members of family treated as one shareholder, under the definition of a small business corporation.

⁴³ Pub. L. No. 78-410, 58 Stat. 682 (1944).

⁴⁴ ACA FAQs Part I (http://www.dol.gov/ebsa/faqs/faq-aca.html), FAQ-14 provides:

⁴⁵ Pub. L. No. 99-272, 100 Stat. 82.

⁴⁶ Prop. Reg. § 54.4980H-5(e)(2)(i).

⁴⁷ Prop. Reg. § 54.4980H-5(e)(2)(ii).

⁴⁸ Prop. Reg. § 54.4980H-5(e)(2)(iii). Under the Federal poverty line safe harbor in Proposed Regulation section 54.4980H-5(e)(2)(iv), the required employee contribution for a month for self-only coverage for the lowest cost option that provides minimum essential coverage and minimum value must not exceed 9.5% of the most recently published Federal poverty level for a single individual for the applicable calendar year, divided by 12.

⁴⁹ Pub. L. No. 104-191, 100 Stat. 2548.

⁵⁰ Prop. Reg. § 1.36B-2(c)(3)(v)(A)(4) provides that the Commissioner may provide rules in published guidance for determining how wellness incentives are treated in determining the affordability of eligible employer-sponsored coverage for purposes of determining eligibility for the health insurance premium tax credit under section 36. In the preamble to the Proposed Regulations under section 36B, the Service requested comments on how wellness incentives "affect the affordability of eligible employer-sponsored coverage for employees and related individuals, and how incentives are earned and applied." In addition, the Service noted that "the administrability of any rule on wellness incentives must consider the extent to which employees can be certain they will qualify for the incentives at the time they otherwise would be evaluated for eligibility for advance credit payments." 77 Fed. Reg. 30,377, 30,380 (2012).

⁵¹ 77 Fed. Reg. 70,620 (2012).

⁵² 77 Fed. Reg. 70,620, 70,622 (2012).

⁵³ Prop. Reg. § 54.4980H-5(e)(2)(iii).