This past June, the IRS's Office of Chief Counsel released an information letter on employer shared responsibility under Internal Revenue Code Section 4980H as set forth under the Affordable Care Act. The letter serves as a response to an inquiry from a legislator on behalf of a constituent who owns a small business.
The constituent's company is subject to federal prevailing wage laws under the Service Contract Act (SCA) and has grown to become an applicable large employer (ALE) under the Affordable Care Act for purposes of employer shared responsibility. ALEs may be subject to penalties under Sec. 4980H if they fail to offer adequate and affordable health insurance to full-time employees and their dependents.
The letter explains the requirements for offering affordable health coverage under employer shared responsibility and coordination of those rules with the SCA. The SCA requires certain employers to pay workers specified wage rates and fringe benefits, and it allows for cash payments in lieu of health benefits.
In general, for purposes of determining whether coverage is affordable under employer shared responsibility, employer contributions reduce employees' required contributions so long as they can be used exclusively for medical expenses (including coverage under an employer-sponsored health plan) — but not if they can be received as cash or other taxable benefits or used to buy nonhealth benefits.
There is, however, a special rule for employers subject to the SCA. Transitional relief allows these employers to treat certain employer contributions that don't satisfy the general principle as reducing an employee's required contribution for purposes of the Sec. 4980H(b) penalty until the applicability date of any further guidance — and, in any event, for plan years beginning before 2017 — if certain requirements are met. (As of this writing, further guidance hasn't been issued relating to payments in lieu of benefits that may be available to employees because of prevailing wage laws.)
Responding to concerns that insurers may not be willing to offer health coverage if too many employees decline to enroll and the participation rate drops below certain levels, the letter notes that insurers in the large group market may not impose minimum participation rules. Thus, minimum participation doesn't act as an impediment to ALEs in allowing them to offer coverage to reduce or avoid employer shared responsibility penalties.
Although the information letter doesn't break any new ground, it may be of interest to certain employers in understanding the interaction between an ALE's responsibilities under employer shared responsibility and under prevailing wage laws. In addition, it serves as a reminder that the IRS is continuing to enforce the employer shared responsibility requirements — including penalty assessments under Sec. 4980H.
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