Group Comments on Employer Shared Responsibility Provisions

Thank you for your continued willingness to consider comments from the American Benefits Council (the Council) regarding the application of the employer shared responsibility provisions of Internal Revenue Code (Code) section 4980H to employees governed by the Service Contract Act (SCA) or Davis-Bacon Act (DBA).

The Service Contract Act (SCA) and the Davis-Bacon Act (DBA) generally require employers contracting with the federal government to pay SCA- or DBA-governed employees certain hourly wage payments as well as certain bona fide fringe benefits. Many employers choose to satisfy their bona fide fringe benefit obligations via the payment of additional cash wages. To the extent permitted by the employer, the SCA-or DBA-governed employee can then use these additional wage payments to purchase benefits from among a suite of employer-provided benefits (such as medical, dental, vision, and 401(k) elective contribution, to name a few). In many instances, these benefits can be purchased with pre-tax wages by employees through the use of the employer's Code Section 125 cafeteria plan.

The Council and its members are concerned that many SCA- and DBA-governed employers could be left in a difficult position unless the Treasury Department (Treasury) and the Internal Revenue Service (IRS) issue clarifying guidance as discussed below. This is because these employers could find themselves having to go out-of-pocket -- beyond that required by the DBA or SCA -- in order to comply with the ACA's employer shared responsibility provision. Moreover, in many instances, employers may not be able to recoup these additional expenses from the federal government under their specific contracts with the federal government.

We are also concerned that SCA- and DBA-governed employees may also find themselves without access to wages they have come to depend upon to pay day-to-day expenses or otherwise. We are concerned that these employees could find themselves with effectively lower take-home pay and could incur resulting financial hardship.

In light of the foregoing, the Council is requesting that Treasury and the IRS issue the following guidance:

An SCA- or DBA-governed employer does not fail to offer "affordable" coverage for purposes of the employer shared responsibility provision merely because it allows the employee to elect to receive the employer premium subsidy as cash in lieu of coverage.

We understand that Treasury recently issued a final regulations with respect to Code section 36B ("Code Section 36B Final Regulations") that could be read to indicate that to the extent an employer makes available flex credits through a Code section 125 plan, and such credits are not only available for use by an employee in purchasing health care, that such amounts are disregarded when determining whether an employer offers "affordable" coverage for purposes of Code sections 36B and 4980H.

Per the Council's written comments dated April 28, 2014, we strongly urged the issuance of a rule that would have permitted all employers (regardless of whether governed by the SCA or DBA) to take into account flex credits in determining affordability, even where such flex credits can be used by an employee for the purchase of additional cash wages.

The Council believes the requested rule makes good policy sense. First, certain employees may have coverage from other sources (e.g., TRICARE, Department of Veterans Affairs, a spouse's employer's group health plan). Accordingly, these employees may not need, nor want, the coverage being offered by their employer. Second, a contrary rule would likely cause many employers to limit some compensation to the form of a premium subsidy, which would likely have the effect of reducing employee choice (and in some instances, employee compensation for those employees that forego the employer-sponsored group health plan coverage).

Moreover, the requested rule would be especially beneficial to SCA- and DBA-governed employees and employers. This is because such a rule would permit their employees to continue to purchase "affordable" employer-sponsored coverage if so desired. On the other hand, if an employee prefers to receive the bona fide fringe benefit payment as additional wages in lieu of coverage, he or she may elect to receive such amounts as taxable wages.

We believe the above-referenced rule from the Code Section 36B Final Regulations should, at minimum, not be made applicable to SCA-and DBA-governed employers because of such employers' continuing obligations under the SCA and/or the DBA, as applicable.

As discussed, under the SCA and DBA, an employer is obligated to pay to each employee covered by a contract not only a specified hourly wage payment, but also specified fringe benefits on a per hour basis. Significantly, the fringe benefit is typically set out as an hourly fringe benefit rate and Department of Labor (DOL) Wage and Hour Division rules permit employers to satisfy this obligation through the payment of additional cash wages.

Accordingly, if the apparent rule set forth in the Code Section 36B Final Regulations is made applicable to SCA- and DBA-governed employers, these employers would now need to satisfy their bona fide fringe benefit obligations through the payment of a dedicated employer premium subsidy for health (or risk effective double payment as discussed further below). Nonetheless, if an SCA- or DBA-governed employee chooses not to enroll in the major medical coverage sponsored by his or her employer, the employer remains obligated under SCA and DBA rules to deliver the requisite bona fide fringe benefits to the employee. Accordingly, the employer will need to offer the employee additional fringe benefit payments (likely in the form of cash wages).

While the Council continues to advocate for a rule contrary to that set forth in the Code Section 36B Final Regulations for all employers, not just government contractors, the Council also believes that -- at a minimum -- SCA- and DBA-governed employers should be deemed to offer affordable coverage as long as the governed employee can use the bona fide fringe benefit payments to purchase tax-free employer-paid health care. (Notably, this could be found to be the case for Code Section 4980H only and not also Code Section 36B.) This should be the case even if the employee chooses not to enroll in employer-sponsored health coverage and instead chooses to receive the requisite fringe benefits from the employer as additional cash wages. We believe such a rule makes good policy sense. Moreover, we believe such a rule is in fact compelled by the overlay of an employer's SCA and DBA obligations.

We note that a contrary rule would seem to require SCA- and DBA-governed employers to effectively double pay (which is unlike an employer not otherwise governed by the SCA or DBA). This is because, in order for SCA- and DBA-governed employers to be certain they are satisfying their bona fide fringe benefit obligations, they will now need to pay the requisite fringe benefits outside of the major medical plan (such as in the form of additional taxable wages, premium subsidies towards other welfare plan benefits, or 401(k) contributions). As noted above, an employee could always elect to not enroll in the offered coverage. These employers would, however, still need to offer subsidized coverage in order to ensure that they are offering "affordable" coverage for purposes of Code section 4980H. Thus, they would effectively be required to double pay with respect to their SCA- or DBA-governed employees.

Lastly, while the issues discussed above only apply to an employee covered by a government contract, we urge Treasury to fashion relief that would not compel employers to have different benefit policies for their employees that are governed by the SCA or DBA, and those that are not. Similarly, we urge Treasury not to fashion relief that would compel employers to make distinctions between SCA- and DBA-governed employees who have access to other coverage (such as TRICARE) and those SCA- and DBA-governed employees that do not have such access to other coverage. Requiring employers (by directive or mere economic reality) to make such distinctions runs contrary to employer interests in having equitable benefits and pay structures for their employees. Accordingly, we urge Treasury to issue relief that would help SCA-and DBA-governed employees avoid potential overpayment and, if possible, not require employers to make distinctions between those employees governed by the SCA or DBA and those who are not, or between those SCA- or DBA-governed employees that have access to third party coverage.

An employer that offers coverage to a variable hour SCA- or DBA-governed employee is deemed to have offered coverage for a respective month in a stability period if the cost of the coverage to the employee is "affordable" after accounting for bona fide fringe benefit payments paid to the employee in the corresponding month of the measurement period.

Even if Treasury were to make clear that an employer does not fail to offer "affordable" coverage for purposes of Code section 4980H merely because it allows the employee to elect to receive the employer premium subsidy as cash in lieu of coverage, this very helpful piece of guidance would unfortunately not address all of the scenarios giving rise to employer concern.

Specifically, several of our members are concerned about situations where variable hour SCA- or DBA-governed employees may transition from full-time to part-time status. In these instances, the bona fide fringe benefit payments that would be due the employee would be decreased as a result of the variable hour employee's change to part-time status. As a result, the amount of such payments may not be sufficient to provide for "affordable" coverage during the variable hour employee's stability period. This would likely be true even though the employer will have dutifully paid its bona fide fringe benefits to its employees during the full course of the measurement period that preceded the stability period.

To mitigate the adverse effects on employers, the Council requests a rule that permits an employer to consider SCA- or DBA-required bona fide fringe benefit payments paid to the employee during the corresponding month of the preceding measurement period (e.g., month four of the measurement period) in determining whether the coverage offered to the employee in the corresponding month of the stability period (i.e., month four of the stability period) is affordable. To avoid any double counting of bona fide fringe benefit payments, only bona fide fringe benefit payments made in the corresponding month of the measurement period that were not previously considered by the employer in determining its Code section 4980H compliance may be taken into account.

Finally, we encourage the Departments of Treasury and Labor to work together in determining what clarifying guidance to issue with respect to SCA- and DBA-governed employees. Moreover, to the extent DOL agrees that Code section 4980H is not a mandate for purposes of the SCA and the DBA, the Council supports a rule that would deem compliance with Code section 4980H based on an employer's compliance with the DBA or SCA. Such a rule would ensure that SCA- and DBA-governed employees continue to have access to important wage payments and also ensure that employers are not required to come out of pocket with additional monies, some which may not be eligible for recoupment under existing or future government contracts. Moreover, such a rule would resolve many of the administrative complexities related to the application of Code section 4980H to SCA- and DBA-governed employees (including the treatment of variable hour SCA-and DBA-governed employees, as discussed above).

Thank you again for your consideration of these comments and we look forward to answering any questions you may have regarding the above.