So where are they?
Final regulations implementing the Affordable Care Act’s rules governing shared responsibility of employers were widely expected to have “dropped” before the beginning, or perhaps during the first week, of 2014. These regulations implement arguably the most important of the Act’s provisions affecting (large) employers. Either the rumor mill is in need of repair, or something has gone off the proverbial rails with the regulators.
An equally compelling question is, once we get final rules, what will they say? The proposed rules invited comments on a wide range of issues, and public comments raised others. Invitations for comments flag issues which the regulators are trying to better understand or on which they are seeking the best option from a number of alternatives. Either way, those seeking to influence the content of the final rules have a strong incentive to engage in the comment process whenever there is an express invitation to do so. It is with respect to these issues that there is the best chance to move the needle.
Set out below are some selected issues on which the Treasury Department and IRS have either asked for comments or for which comments would be helpful (the italicized text below is taken from the preamble to the proposed regulations):
(1) Identifying a predecessor or successor employer for purposes of identifying an applicable large employer
The Treasury Department and the IRS anticipate that rules similar to this provision may form the basis for the rule on identifying a predecessor or successor employer for purposes of the section 4980H applicable large employer determination, and invite comments on whether these employment tax rules are appropriate and whether any modifications of the rules may be necessary. Until further guidance is issued, taxpayers may rely upon a reasonable, good faith interpretation of the statutory provision on predecessor (and successor) employers for purposes of the applicable large employer determination.
The concept of a predecessor or successor employer is important for payroll tax purposes. A successor employer is an employer that (i) acquires substantially all the property used in a trade or business of another person (predecessor) or used in a separate unit of a trade or business of a predecessor, and (ii) immediately after the acquisition, employs one or more people who were employed by the predecessor. The key feature here is business continuity.
It would appear the employers would not be prejudiced if the final regulations draw upon the payroll tax rules when crafting a final rule.
(2) Treatment of employees of educational institutions who work a 9-month academic year as “full-time”
These proposed regulations address these special issues presented by educational institutions by providing an averaging method for employment break periods that generally would result in an employee who works full-time during the active portions of the academic year being treated as a fulltime employee for section 4980H. Comments are invited on any remaining issues relating to teachers, other educational organization employees, or industries with comparable circumstances.
The preamble to the proposed regulations makes amply clear that employees of educational institutions who work a 9-month academic year may not be treated as seasonal. They instead intend a 9-month academic year to be full-time for Code § 4980H purposes. But this is only the tip of a very large iceberg. One particularly contentious issue is the treatment of adjunct faculty. Other issues include the treatment of coaches, tutors, cafeteria workers, part-time faculty, and even building and grounds personnel. In many of these cases, tracking hours is a challenge. And there is the separate issue of non-employee service providers such as bus drivers employed by commercial third-party firms. These rules are in desperate need of amplification and clarification.
(3) Treatment of workers placed through temporary staffing agencies
[C]omments are invited on whether and, if so, how a special safe harbor or presumption should or could be developed with respect to the variable hour employee classification of the common law employees of temporary staffing agencies that would contain restrictions or safeguards intended to address these concerns while still providing useful guidance for employers and employees in this industry. More generally, further comments are invited on whether special rules for identifying full-time employees or any other issues relating to section 4980H may be necessary in the case of temporary staffing agencies, especially in light of the employment break period rules proposed in these regulations.
The treatment of workers placed through temporary staffing agencies is one of the most difficult issues raised in the proposed regulations. Despite the fact that this topic is discussed at some length in the proposed regulations (and also merits some dedicated examples), it is an area in which the current guidance is difficult to apply. One of the biggest challenges is determining an employee’s status as a “variable hour” employee. One suggested approach would ask “(1) whether the employee is replacing an employee who is a full-time employee; and (2) whether the hours of service of ongoing employees in the same or comparable positions actually vary.” The problem with this or any facts-and-circumstances test is that the test must be applied worker-by-worker. That sort of determination would pose daunting if not insurmountable logistical challenges, particularly for large commercial staffing firms that issue hundreds of thousands of Form W-2s each year.
(4) Definition of “seasonal employee”
Notice 2012–58 provides that, through at least 2014, employers are permitted to use a reasonable, good faith interpretation of the term “seasonal employee” for purposes of this notice. Notice 2012–58 also requested comments on the definition of ‘‘seasonal worker’’ as set forth in section 4980H(c)(2)(B)(ii) for purposes of determining status as an applicable large employer. Specifically, the request for comments asked about the practicability of using different definitions for different purposes (such as for determining status as an applicable large employer versus determining the full-time employee status of a new employee); and whether other, existing legal definitions should be considered in defining a seasonal worker under section 4980H (such as the safe harbor for seasonal employees in the final sentence of § 1.105–11(c)(2)(iii)(C)).
The Act and the proposed regulations use two terms that are often confused: For purposes of establishing an employer’s status as an “applicable large employer,” certain “seasonal workers” may be excluded. The term “seasonal worker” is defined with reference to a long-standing Department of Labor regulation. For purposes of applying look-back measurement period rules, new “seasonal employees” need not be extended an offer of coverage during their initial measurement period. The term “seasonal employees” is not defined. Instead, employers are currently permitted to use a reasonable, good faith interpretation of the term.
The reference to the final sentence of § 1.105–11(c)(2)(iii)(C) is curious. That provision envisions defining an employee with an annual period of service of less than seven months as a seasonal employee. So the current rule is generally a favorable one for employers. The final rule is likely to be more restrictive.
(5) Extension of the fiscal plan year transition rules to 2015
Commenters on behalf of employers sponsoring plans with plan years other than the calendar year (fiscal year plans) addressed two issues in particular. First, these commenters noted that because the terms and conditions of coverage are difficult to change in the middle of a plan year, application of section 4980H to fiscal year plans as of January 1, 2014 would, in many cases, require compliance with section 4980H for the entire fiscal year plan year beginning in 2013 (the 2013 plan year).
While the proposed regulations did include a fiscal plan year transition rule, the regulators have been silent on whether that rule may be applied in 2015. (We addressed the issue of transition rules in an earlier post).
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So what happens if final regulations are not forthcoming? The preamble to the proposed regulations furnishes some help:
“Employers may rely on these proposed regulations for guidance pending the issuance of final regulations or other guidance. Final regulations will be effective as of a date not earlier than the date the final regulations are published in the Federal Register. If and to the extent future guidance is more restrictive than the guidance in these proposed regulations, the future guidance will be applied without retroactive effect and employers will be provided with sufficient time to come into compliance with the final regulations.”
While reliance is welcome, it does nothing to resolve the issues set out above, among many others. Employers could muddle through applying the proposed rules. But unlike final regulations, which have the force of law, proposed regulations are not binding, which might be read as license to read Code § 4980H very broadly. Many of the provisions of the proposed rule—e.g., the look-back measurement period—are already modestly aggressive, however. So the proposed rules might not be a bad place to start. (But having final regulations on which to rely is infinitely preferable to trying to apply the current, proposed rules.)
In closing, I invite readers to submit their own suggestions for issues that they would like to see elucidated in final regulations. Those items that generate a strong consensus will be the subject of future blog posts.