[Federal Register Volume 78, Number 1 (Wednesday, January 2, 2013)]
[Proposed Rules]
[Pages 217-253]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-31269]



[[Page 217]]

Vol. 78

Wednesday,

No. 1

January 2, 2013

Part V





Department of the Treasury





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Internal Revenue Service





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26 CFR Parts 1, 54 and 301





Shared Responsibility for Employers Regarding Health Coverage; Proposed 
Rule

Federal Register / Vol. 78 , No. 1 / Wednesday, January 2, 2013 / 
Proposed Rules

[[Page 218]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 54 and 301

[REG-138006-12]
RIN 1545-BL33


Shared Responsibility for Employers Regarding Health Coverage

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations providing guidance 
under section 4980H of the Internal Revenue Code (Code) with respect to 
the shared responsibility for employers regarding employee health 
coverage. These proposed regulations would affect only employers that 
meet the definition of ``applicable large employer'' as described in 
these proposed regulations. As discussed in section X of this preamble, 
employers may rely on these proposed regulations for guidance pending 
the issuance of final regulations or other applicable guidance. This 
document also provides notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by March 18, 
2013. Outlines of topics to be discussed at the public hearing 
scheduled for April 23, 2013, at 10:00 a.m., must be received by April 
3, 2013.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138006-12), Internal 
Revenue Service, room 5203, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand-delivered Monday through Friday 
between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-138006-12), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-138006-12). The public hearing will be 
held in the Auditorium, Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
call Kathryn Bjornstad at (202) 927-9639; concerning submissions of 
comments, the hearing, and/or to be placed on the building access list 
to attend the hearing, call Oluwafunmilayo Taylor at (202) 622-7180 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed Pension Excise Tax Regulations (26 
CFR part 54) under section 4980H of the Code. Section 4980H was added 
to the Code by section 1513 of the Patient Protection and Affordable 
Care Act, enacted March 23, 2010, Public Law 111-148, and amended by 
section 1003 of the Health Care and Education Reconciliation Act of 
2010, enacted March 30, 2010, Public Law 111-152, and further amended 
by the Department of Defense and Full-Year Continuing Appropriations 
Act, 2011, Public Law 112-10 (125 Stat. 38, (2011)), (collectively, the 
Affordable Care Act). Section 4980H is effective for months beginning 
after December 31, 2013.

I. Section 4980H

In General
    Section 4980H generally provides that an applicable large employer 
is subject to an assessable payment if either (1) the employer fails to 
offer to its full-time employees (and their dependents) the opportunity 
to enroll in minimum essential coverage \1\ (MEC) under an eligible 
employer-sponsored plan and any full-time employee is certified to the 
employer as having received an applicable premium tax credit or cost-
sharing reduction (section 4980H(a) liability), or (2) the employer 
offers its full-time employees (and their dependents) the opportunity 
to enroll in MEC under an eligible employer-sponsored plan and one or 
more full-time employees is certified to the employer as having 
received an applicable premium tax credit or cost-sharing reduction 
(section 4980H(b) liability). Generally, section 4980H(b) liability may 
arise because, with respect to a full-time employee who has been 
certified to the employer as having received an applicable premium tax 
credit or cost-sharing reduction, the employer's coverage is 
unaffordable within the meaning of section 36B(c)(2)(C)(i) or does not 
provide minimum value within the meaning of section 
36B(c)(2)(C)(ii).\1\ As noted, an employer may be liable for an 
assessable payment under section 4980H(a) or (b) only if one or more 
full-time employees are certified to the employer as having received an 
applicable premium tax credit or cost-sharing reduction.
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    \1\ See section III of the Background section of the preamble 
for a discussion of MEC, minimum value and affordability.
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    The assessable payment under section 4980H(a) is based on all 
(excluding the first 30) full-time employees, while the assessable 
payment under section 4980H(b) is based on the number of full-time 
employees who are certified to the employer as having received an 
applicable premium tax credit or cost-sharing reduction with respect to 
that employee's purchase of health insurance for himself or herself on 
an Exchange. In contrast, an employee's receipt of a premium tax credit 
or cost sharing reduction with respect to coverage for a dependent will 
not result in liability for the employer under section 4980H. Under 
section 4980H(b), liability is contingent on whether the employer 
offers minimum essential coverage under an eligible employer-sponsored 
plan, and whether that coverage is affordable and provides minimum 
value, as determined by reference to the cost and characteristics of 
employee-only coverage offered to the employee. Section 4980H(c)(4) 
provides that a full-time employee with respect to any month is an 
employee who is employed on average at least 30 hours of service per 
week. An applicable large employer with respect to a calendar year is 
defined in section 4980H(c)(2) as an employer that employed an average 
of at least 50 full-time employees on business days during the 
preceding calendar year. For purposes of determining whether an 
employer is an applicable large employer, full-time equivalent 
employees (FTEs), which are statutorily determined based on the hours 
of service of employees who are not full-time employees, are taken into 
account.

II. Previous Guidance

    The Treasury Department and the IRS have published four notices 
addressing issues under section 4980H. Each notice, briefly summarized 
in this section of the preamble, outlined potential approaches to 
future guidance, and each requested public comments. See Notice 2011-36 
(2011-21 IRB 792), Notice 2011-73 (2011-40 IRB 474), Notice 2012-17 
(2012-9 IRB 430), and Notice 2012-58 (2012-41 IRB 436). Notice 2012-58 
also provided guidance that taxpayers may rely upon for periods 
specified in the notice. Extensive public comments were submitted in 
response to each of the four notices. See Sec.  601.601(d)(2).
A. Notice 2011-36
    Notice 2011-36 addressed the definitions of employer, employee, and 
hours of service. The notice also specifically described and requested 
comments on a possible approach that would permit employers to use an 
optional ``look-back/stability period safe harbor'' to determine 
whether ongoing employees (that is, employees other

[[Page 219]]

than new employees) are full-time employees for purposes of determining 
and calculating assessable payments under section 4980H. (In the 
proposed regulations and the remainder of this preamble, this optional 
safe harbor method generally is referred to, for convenience, as the 
``look-back measurement method.'') This method may not be used for 
purposes of determining status as an applicable large employer, which 
is prescribed by the statute.
    Under this method, an employer would determine each ongoing 
employee's status as a full-time employee by looking back at a defined 
period of not less than three but not more than 12 consecutive calendar 
months, as chosen by the employer (the measurement period), to 
determine whether during that measurement period the employee was 
employed on average at least 30 hours of service per week. If the 
employee were determined to be employed on average at least 30 hours of 
service per week during the measurement period, then the employee would 
be treated as a full-time employee during a subsequent period (the 
stability period), regardless of the employee's hours of service during 
the stability period, so long as he or she remained an employee. For an 
employee who has been determined to be employed on average at least 30 
hours of service per week during the measurement period, the stability 
period would be a period that followed the measurement period, and the 
duration of which was at least the greater of six consecutive calendar 
months or the length of the measurement period. If the employee were 
employed on average less than 30 hours per week during the measurement 
period, the employer would be permitted to treat the employee as not a 
full-time employee during a stability period that followed the 
measurement period, but the length of the stability period could not 
exceed the length of the measurement period.
    Notice 2011-36 also outlined potential approaches under section 
4980H for determining whether an employer is an applicable large 
employer, including calculating the number of the employer's full-time 
employees and full-time equivalents, defining employer and employee, 
and calculating the number of hours of service completed by an 
employee.
B. Notice 2011-73
    Notice 2011-73 addressed the requirement that, in order to avoid a 
potential assessable payment under section 4980H(b), the coverage 
offered be affordable, generally meaning that the employee portion of 
the self-only premium for the employer's lowest cost coverage that 
provides minimum value not exceed 9.5 percent of the employee's 
household income. Recognizing the inability of employers to ascertain 
their employees' total household incomes, Notice 2011-73 described a 
potential safe harbor under which coverage offered by an employer to an 
employee would be treated as affordable for section 4980H liability 
purposes if the employee's required contribution for that coverage was 
no more than 9.5 percent of the employee's wages from the employer 
reported in Box 1 of the Form W-2 (Form W-2 wages) instead of household 
income. This potential affordability safe harbor would apply in 
determining whether an employer is subject to the assessable payment 
under section 4980H(b), but would not affect an employee's eligibility 
for a premium tax credit under section 36B.
C. Notice 2012-17
    Notice 2012-17 stated that the Treasury Department and the IRS 
intended to incorporate the look-back measurement method described in 
Notice 2011-36 and the affordability safe harbor described in Notice 
2011-73 into upcoming proposed regulations or other guidance.
    Notice 2012-17 also described and requested comments on a potential 
approach for determining the full-time status of a new employee. Under 
that approach, if, based on the facts and circumstances at the date the 
employee began providing services to the employer (the start date), a 
new employee was reasonably expected to be employed an average of 30 
hours of service per week on an annual basis and was employed full-time 
during the first three months of employment, the employer's group 
health plan would be required to offer the employee coverage as of the 
end of that period in order to avoid a potential section 4980H 
assessable payment for periods after the end of that three-month 
period. In contrast, if, based on the facts and circumstances at the 
start date, it could not reasonably be determined whether the new 
employee was expected to be employed on average at least 30 hours of 
service per week because the employee's hours were variable or 
otherwise uncertain, employers would be given three months or, in 
certain cases, six months, without incurring an assessable payment 
under section 4980H, to determine whether the employee was a full-time 
employee.
    In response to Notice 2012-17, many commenters requested that 
employers be allowed to use a measurement period of up to 12 months to 
determine the status of new employees, similar to the potential 
approach outlined in Notice 2011-36 to determine the status of ongoing 
employees (although some commenters were not in favor of allowing a 
measurement period of up to 12 months for new employees).
D. Notice 2012-58
    Notice 2012-58 provided employers reliance, through at least the 
end of 2014, on the guidance contained in that notice and on the 
following approaches described in the prior notices discussed in this 
section of the preamble: (1) For ongoing employees, an employer will be 
permitted to use measurement and stability periods of up to 12 months; 
(2) for new employees who are reasonably expected to be full-time 
employees, an employer that maintains a group health plan that meets 
certain requirements will not be subject to an assessable payment under 
section 4980H for failing to offer coverage to the employee for the 
initial three months of employment; and (3) for all employees, an 
employer will not be subject to an assessable payment under section 
4980H(b) for failure to offer affordable coverage to an employee if the 
coverage offered to that employee was affordable based on the 
employee's Form W-2 wages and otherwise provided minimum value.
    Notice 2012-58 also announced and provided similar reliance on a 
revised optional look-back measurement method for new employees with 
variable hours and new seasonal employees that more closely resembled 
the optional method for ongoing employees described in Notice 2011-36. 
The expanded method provides employers the option to use a measurement 
period of up to 12 months to determine whether new variable-hour 
employees or seasonal employees are full-time employees, without being 
subject to an assessable payment under section 4980H for this period 
with respect to those employees. Under this approach, a new employee is 
a variable hour employee if, based on the facts and circumstances at 
the employee's start date, it cannot be determined that the employee is 
reasonably expected to be employed on average at least 30 hours of 
service per week.
    In addition, Notice 2012-58 proposed and provided similar reliance 
on an option for employers to use specified administrative periods (in 
conjunction with specified measurement periods) for ongoing employees 
and certain new employees, and facilitated a transition for new 
employees from the determination method the employer

[[Page 220]]

chose to use for new employees to the determination method the employer 
chose to use for ongoing employees. Notice 2012-58 provided employers 
reliance for these options, through at least the end of 2014.

III. Minimum Essential Coverage, Minimum Value and Affordability

    Under section 4980H, an applicable large employer member \2\ may be 
subject to an assessable payment under section 4980H(a) if the employer 
fails to offer its full-time employees (and their dependents) the 
opportunity to enroll in MEC under an eligible employer-sponsored plan. 
Also, under section 4980H(b), an applicable large employer member may 
be subject to an assessable payment if its offer of MEC under an 
eligible employer-sponsored plan is unaffordable (within the meaning of 
section 36B(c)(2)(C)(i)) or does not provide minimum value (within the 
meaning of section 36B(c)(2)(C)(ii)). The determinations of MEC, 
minimum value and affordability are all determined by reference to 
other statutory provisions, but also all relate to the determination of 
liability under section 4980H, as described in this section of the 
preamble.
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    \2\ For explanation of applicable large employer and applicable 
large employer member, see section I.A.2. and section III.A. of the 
preamble. If the applicable large employer consists of only one 
entity, rather than a controlled group of entities, then the 
applicable large employer member is the applicable large employer.
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A. Minimum Essential Coverage--In General
    MEC is defined in section 5000A(f). Section 5000A(f)(1)(B) provides 
that MEC includes coverage under an eligible employer-sponsored plan. 
Under section 5000A(f)(2), an eligible employer-sponsored plan is a 
group health plan or group health insurance coverage offered by an 
employer to an employee that is a governmental plan (within the meaning 
of section 2791(d)(8) of the Public Health Service Act (42 U.S.C. 
300gg-91(d)(8))), any other plan or coverage offered in the small or 
large group market, or a grandfathered plan offered in the group 
market. Section 5000A(f)(3) provides that MEC does not include health 
insurance coverage which consists of coverage of excepted benefits 
described in section 2791(c)(1) of the Public Health Service Act, or 
sections 2971(c)(2), (3) or (4) of the Public Health Service Act if the 
benefits are provided under a separate policy, certificate, or contract 
of insurance. Future regulations under section 5000A are expected to 
provide further guidance on the definition of MEC and eligible 
employer-sponsored plans. These regulations under section 5000A are 
expected to provide that an employer-sponsored plan will not fail to be 
MEC solely because it is a plan to reimburse employees for medical care 
for which reimbursement is not provided under a policy of accident and 
health insurance (a self-insured plan).
B. Minimum Value--In General
    If the coverage offered by an applicable large employer fails to 
provide minimum value, an employee may be eligible to receive a premium 
tax credit. Under section 36B(c)(2)(C)(ii), a plan fails to provide 
minimum value if the plan's share of the total allowed costs of 
benefits provided under the plan is less than 60 percent of those 
costs. Section 1302(d)(2)(C) of the Affordable Care Act sets forth the 
rules for calculating the percentage of total allowed costs of benefits 
provided under a group health plan or health insurance plan. Notice 
2012-31 (2012-20 IRB 906) requested comments on potential approaches 
for determining minimum value.
    On November 26, 2012, the Department of Health and Human Services 
(HHS) issued proposed regulations providing guidance on methodologies 
for determining minimum value (77 FR 70644). Those HHS proposed 
regulations provide that the percentage of the total allowed cost of 
benefits will be determined using one of the main methodologies 
described in those proposed regulations and Notice 2012-31. These 
methodologies include a minimum value calculator which will be made 
available by HHS and the IRS. The proposed regulations also provide 
that minimum value for employer-sponsored self-insured group health 
plans and insured large group health plans will be determined using a 
standard population that is based upon large self-insured group health 
plans. Also, as there is no requirement that employer-sponsored self-
insured and insured large group health plans offer all categories of 
essential health benefits or conform to any of the essential health 
benefit benchmarks, the proposed regulations describe how to take 
account of a benefit that an employer offers that is outside the 
parameters of the minimum value calculator. The Treasury Department and 
the IRS intend to propose additional guidance under section 36B with 
respect to minimum value. All comments received in response to Notice 
2012-31 are being considered in connection with the development of that 
guidance.
C. Affordability--In General
    For purposes of eligibility for the premium tax credit, coverage 
for an employee under an employer-sponsored plan is affordable if the 
employee's required contribution (within the meaning of section 
5000A(e)(1)(B)) for self-only coverage \3\ does not exceed 9.5 percent 
of the employee's household income for the taxable year. See section 
36B(c)(2)(C)(i) and Sec.  1.36B-1(e). Household income for purposes of 
section 36B is defined as the modified adjusted gross income of the 
employee and any members of the employee's family (including a spouse 
and dependents) who are required to file an income tax return. Section 
36B(d)(2)(A). Modified adjusted gross income means adjusted gross 
income (within the meaning of section 62) increased by (1) amounts 
excluded from gross income under section 911, (2) the amount of any 
tax-exempt interest a taxpayer receives or accrues during the taxable 
year, and (3) an amount equal to the portion of the taxpayer's social 
security benefits (as defined in section 86(d)) which is not included 
in gross income under section 86 for the taxable year. See section 
36B(d)(2)(B) and Sec.  1.36B-1(e)(2).
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    \3\ TD 9590 (77 FR 30377) reserved the rules under section 36B 
on determining affordability of coverage under an eligible employer-
sponsored plan for individuals eligible for coverage because of a 
relationship to an employee.
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Explanation of Provisions

    The proposed regulations generally incorporate the provisions of 
Notice 2012-58, as well as many of the provisions of Notices 2011-36, 
2011-73, and 2012-17, with some modifications in response to comments. 
The regulations also propose guidance on additional issues. Employers 
will be permitted to rely on these proposed regulations to the extent 
described in the section X of this preamble.
    The proposed regulations are organized as follows: definitions 
(proposed Sec.  54.4980H-1), rules for determining status as an 
applicable large employer and applicable large employer member 
(proposed Sec.  54.4980H-2), rules for determining full-time employees 
(proposed Sec.  54.4980H-3), rules for determining assessable payments 
under section 4980H(a) (proposed Sec.  54.4980H-4), rules for 
determining whether an employer is subject to assessable payments under 
section 4980H(b) (proposed Sec.  54.4980H-5), and rules relating to the 
administration and assessment of assessable payments under section 
4980H (proposed Sec.  54.4980H-6).

[[Page 221]]

I. Determination of Applicable Large Employer Status

A. Identification of Employer and Employees
1. In General
    Only applicable large employers may be liable for an assessable 
payment under section 4980H. Section 4980H(c)(2) defines an applicable 
large employer with respect to a calendar year as an employer that 
employed an average of at least 50 full-time employees (taking into 
account FTEs) on business days during the preceding calendar year. The 
proposed regulations adopt the position outlined in Notice 2011-36 
under which an employee is an individual who is an employee under the 
common law standard, and an employer is the person that is the employer 
of an employee under the common law standard. Under the common law 
standard, an employment relationship exists when the person for whom 
the services are performed has the right to control and direct the 
individual who performs the services, not only as to the result to be 
accomplished by the work but also as to the details and means by which 
that result is accomplished. Under the common law standard, an 
employment relationship exists if an employee is subject to the will 
and control of the employer not only as to what shall be done but how 
it shall be done. In this connection, it is not necessary that the 
employer actually direct or control the manner in which the services 
are performed; it is sufficient if the employer has the right to do so. 
See Sec. Sec.  31.3121(d)-1(c), 31.3231(b)-1(a)(2), 31.3306(i)-1(b), 
and 31.3401(c)-1(b).
    Several commenters responding to Notice 2011-36 asked that the 
definition of employer in the Fair Labor Standards Act be used instead 
of the common law employer. However, the term employer, as generally 
used in the Code, refers to the common law employer. Further, use of 
the common law standard is consistent with the definition of employer 
generally applied in Title I of the Affordable Care Act (which includes 
section 4980H). Specifically, section 1551 of the Affordable Care Act 
provides that ``unless specifically provided otherwise, the definitions 
contained in section 2791 of the Public Health Service Act (42 U.S.C. 
300gg-91) shall apply with respect to this title.'' Section 2791 of the 
Public Health Service Act provides that the term employer has the 
meaning given that term in section 3(5) of the Employee Retirement 
Income Security Act (ERISA) (29 U.S.C. 1002(5)), that is, the common 
law employer. For these reasons, the proposed regulations do not adopt 
this comment and instead use the common law standard for determining an 
employee's employer.
    As noted in Notice 2011-36, section 414(n), which treats leased 
employees (as defined in section 414(n)(2)) as employees of the service 
recipient for various purposes, does not cross-reference section 4980H 
(and is not cross-referenced by section 4980H) and accordingly does not 
apply for section 4980H purposes. In addition, for purposes of section 
4980H, a sole proprietor, a partner in a partnership, or a 2-percent S 
corporation shareholder is not an employee; but an individual who 
provides services as both an employee and a non-employee (such as an 
individual serving as both an employee and a director) is an employee 
with respect to his or her hours of service as an employee.
    The identification of full-time employees for purposes of 
determining status as an applicable large employer under section 4980H 
is, by statute, performed on a look-back basis using data from the 
prior year, taking into account the hours of service of all employees 
employed in the prior year (full-time employees and non-full-time 
employees). Therefore, the look-back measurement method that may be 
used to identify full-time employees for purposes of determining 
potential section 4980H(a) or (b) liability does not apply for purposes 
of determining status as an applicable large employer. Instead, the 
determination of whether an employer is an applicable large employer 
for a year is based upon the actual hours of service of employees in 
the prior year. But see section IX.E. of this preamble for transition 
relief allowing use of a shorter look-back period in 2013 for purposes 
of determining applicable large employer status for 2014.
2. Application of Aggregation Rules
    For purposes of counting the number of full-time and full-time 
equivalent employees for determining whether an employer is an 
applicable large employer, section 4980H(c)(2)(C)(i) provides that all 
entities treated as a single employer under section 414(b), (c), (m), 
or (o) are treated as a single employer for purposes of section 4980H. 
Thus, all employees of a controlled group under section 414(b) or (c), 
or an affiliated service group under section 414(m), are taken into 
account in determining whether the members of the controlled group or 
affiliated service group together constitute an applicable large 
employer.
    Section 4980H applies to all common law employers, including an 
employer that is a government entity (such as Federal, State, local or 
Indian tribal government entities) and an employer that is an 
organization described in section 501(c) that is exempt from Federal 
income tax under section 501(a). The proposed regulations reserve on 
the application of the section 414(b), (c), (m), and (o) aggregation 
rules in section 4980H(c)(2)(C)(i) to government entities and churches, 
or a convention or association of churches (as defined in Sec.  1.170A-
9(b)). Until further guidance is issued, government entities, churches, 
and a convention or association of churches may rely on a reasonable, 
good faith interpretation of section 414(b), (c), (m), and (o) in 
determining whether a person or group of persons is an applicable large 
employer.
    Several commenters asked for clarification of whether the 
aggregation rules used in determining applicable large employer status 
also applied for purposes of determining liability for, and the amount 
of, an assessable payment. The proposed regulations clarify that for a 
calendar year during which an employer is an applicable large employer, 
the section 4980H standards generally are applied separately to each 
person that is a member of the controlled group comprising the employer 
(with each such person referred to as an applicable large employer 
member) in determining liability for, and the amount of, any assessable 
payment. For example, if an applicable large employer is comprised of a 
parent corporation and 10 wholly owned subsidiary corporations, each of 
the 11 corporations, regardless of the number of employees, is an 
applicable large employer member. For a discussion of the related 
information reporting requirements for applicable large employer 
members under section 6056, see section VII of this preamble.
3. Foreign Employers and Foreign Employees
    Some commenters on Notice 2011-36 requested guidance on whether 
foreign employees working for foreign entities are excluded in 
determining status as an applicable large employer, and in determining 
any potential liability under section 4980H. For example, commenters 
asked whether a large foreign corporation with a small U.S. presence 
(under 50 employees) would be subject to section 4980H. These proposed 
regulations generally address these issues through the definition of 
hours of service, discussed in section II.B.2. of this preamble.

[[Page 222]]

4. Successor Employers
    Section 4980H(c)(2)(C)(iii) provides that, for purposes of 
determining applicable large employer status, an employer includes a 
predecessor employer. The regulations reserve, and therefore do not 
address, the specific rules for identifying a predecessor employer (or 
the corresponding successor employer). Rules for identifying successor 
employers have been developed in the employment tax context for 
determining when wages paid by a predecessor may be attributed to a 
successor employer (see Sec.  31.3121(a)(1)-1(b)). 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.
    For purposes of assessment and collection, and not for purposes of 
the applicable large employer determination, State law may provide for 
liability of a successor employer for a section 4980H assessable 
payment which has been, or could have been, imposed on a predecessor 
employer. In that case, the liability could be assessed, paid, and 
collected from the successor employer in accordance with section 6901.
5. New Employers
    Section 4980H(c)(2)(C)(ii) and these proposed regulations provide 
that an employer not in existence during an entire preceding calendar 
year is an applicable large employer for the current calendar year if 
it is reasonably expected to employ an average of at least 50 full-time 
employees (taking into account FTEs) on business days during the 
current calendar year. One commenter suggested that a new employer be 
exempted from any potential assessable payment under section 4980H, or 
alternatively, that the standard should be a minimum period of 
operations in the preceding calendar year. The proposed regulations do 
not adopt this suggestion because it is inconsistent with the statutory 
provision addressing new employers in section 4980H(c)(2)(C)(ii). 
However, comments are requested on whether the final regulations should 
adopt any safe harbors or presumptions to assist a new employer in 
determining whether it is an applicable large employer.
6. Seasonal Workers
    Section 4980H(c)(2)(B)(ii) provides that if an employer's workforce 
exceeds 50 full-time employees for 120 days or fewer during a calendar 
year, and the employees in excess of 50 who were employed during that 
period of no more than 120 days were seasonal workers, the employer is 
not an applicable large employer. Notice 2011-36 provided that, for 
this purpose only, four calendar months would be treated as the 
equivalent of 120 days. In response to comments, and consistent with 
Notice 2011-36, these proposed regulations provide that, solely for 
purposes of the seasonal worker exception in determining whether an 
employer is an applicable large employer, an employer may apply either 
a period of four calendar months (whether or not consecutive) or a 
period of 120 days (whether or not consecutive). Because the 120-day 
period referred to in section 4980H(c)(2)(B)(ii) is not part of the 
definition of the term seasonal worker, an employee would not 
necessarily be precluded from being treated as a seasonal worker merely 
because the employee works, for example, on a seasonal basis for five 
consecutive months. In addition, the 120-day period referred to in 
section 4980H(c)(2)(B)(ii) is relevant only for applying the seasonal 
worker exception for determining status as an applicable large 
employer, and is not relevant for determining whether an employee is a 
seasonal employee for purposes of the look-back measurement method 
(meaning that an employee who provides services for more than 120 days 
per year may nonetheless qualify as a seasonal employee). See section 
II.C.2. of this preamble for a discussion of the application of the 
look-back measurement method to seasonal employees.
    For purposes of the definition of an applicable large employer, 
section 4980H(c)(2)(B)(ii) defines a seasonal worker as a worker who 
performs labor or services on a seasonal basis, as defined by the 
Secretary of Labor, including (but not limited to) workers covered by 
29 CFR 500.20(s)(1) and retail workers employed exclusively during 
holiday seasons. This definition of seasonal worker is incorporated in 
these proposed regulations. The Department of Labor (DOL) regulations 
at 29 CFR 500.20(s)(1) to which section 4980H(c)(2)(B)(ii) refers, and 
that interpret the Migrant and Seasonal Agricultural Workers Protection 
Act, provide that ``[l]abor is performed on a seasonal basis where, 
ordinarily, the employment pertains to or is of the kind exclusively 
performed at certain seasons or periods of the year and which, from its 
nature, may not be continuous or carried on throughout the year. A 
worker who moves from one seasonal activity to another, while employed 
in agriculture or performing agricultural labor, is employed on a 
seasonal basis even though he may continue to be employed during a 
major portion of the year.''
    After consultation with the DOL, the Treasury Department and the 
IRS have determined that the term seasonal worker, as incorporated in 
section 4980H, is not limited to agricultural or retail workers. Until 
further guidance is issued, employers may apply a reasonable, good 
faith interpretation of the statutory definition of seasonal worker, 
including a reasonable good faith interpretation of the standard set 
forth under the DOL regulations at 29 CFR 500.20(s)(1) and quoted in 
this paragraph, applied by analogy to workers and employment positions 
not otherwise covered under those DOL regulations.
    Several commenters suggested that seasonal workers not be counted 
in determining whether an employer is an applicable large employer. 
However, because section 4980H(c)(2) requires the inclusion of seasonal 
workers in the applicable large employer determination (and then 
excludes them only if certain conditions are satisfied), this 
suggestion is not adopted.
7. Full-Time Equivalent Employees
    Solely for purposes of determining whether an employer is an 
applicable large employer for the current calendar year, section 
4980H(c)(2)(E) provides that the employer must calculate the number of 
full-time equivalent employees (FTEs) it employed during the preceding 
calendar year and count each FTE as one full-time employee for that 
year. The proposed regulations apply this provision using the 
calculation method for FTEs that was included in Notice 2011-36. Under 
that method, all employees (including seasonal workers) who were not 
full-time employees for any month in the preceding calendar year are 
included in calculating the employer's FTEs for that month by (1) 
calculating the aggregate number of hours of service (but not more than 
120 hours of service for any employee) for all employees who were not 
employed on average at least 30 hours of service per week for that

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month, and (2) dividing the total hours of service in step (1) by 120. 
This is the number of FTEs for the calendar month.
    In determining the number of FTEs for each calendar month, 
fractions are taken into account. For example, if for a calendar month 
employees who were not employed on average at least 30 hours of service 
per week have 1,260 hours of service in the aggregate, there would be 
10.5 FTEs for that month. However, after adding the 12 monthly full-
time employee and FTE totals, and dividing by 12, all fractions would 
be disregarded. For example, 49.9 full-time employees (including FTEs) 
for the preceding calendar year would be rounded down to 49 full-time 
employees (and thus the employer would not be an applicable large 
employer in the current calendar year).
    Some commenters suggested that the definition of FTE in section 45R 
be used, that equivalencies be used, or that employees not averaging at 
least 30 hours of service per week be counted at fractions of their 
hours of service. Because section 4980H(c)(2)(E) prescribes specific 
definitions and steps in computing FTEs, these suggestions have not 
been adopted.

II. Identifying Full-Time Employees for Section 4980H Purposes

A. General Rule
    Section 4980H(c)(4) provides that, for purposes of section 4980H, a 
full-time employee is an employee who was employed on average at least 
30 hours of service per week. One commenter suggested that the proposed 
regulations use the term ``hours of service'' instead of, for example, 
``hours worked'' (a term sometimes used in Notice 2012-58), noting that 
``hours of service'' is the statutory term and includes not only hours 
when work is performed but also hours for which an employee is paid or 
entitled to payment even when no work is performed. This suggestion has 
been adopted. In addition, various commenters responding to Notice 
2011-36 suggested that, for purposes of section 4980H, the term ``full-
time employee'' should be defined by reference to a higher threshold, 
for example 32, 35, or 40 hours of service per week. Because section 
4980H(c)(4)(A) defines a full-time employee as an employee employed on 
average at least 30 hours of service per week, these suggestions have 
not been adopted.
    Pursuant to the approach initially described in Notice 2011-36, 
these proposed regulations would treat 130 hours of service in a 
calendar month as the monthly equivalent of 30 hours of service per 
week ((52 x 30) / 12 = 130). This monthly standard takes into account 
that the average month consists of more than four weeks. Some 
commenters argued that the 130 hour monthly standard is not an 
appropriate proxy for 30 hours per week during certain shorter calendar 
months. However, the 130 hour monthly standard may also be lower than 
an average of 30 hours per week during other longer months of the 
calendar year (for example, the seven calendar months that consist of 
31 days) and, therefore, any effect of this approximation will balance 
out over the calendar year (for example, over a 12-month measurement 
period, over two successive six-month measurement periods, or over four 
successive three-month measurement periods). Accordingly, in the 
interest of administrative simplicity, the proposed regulations retain 
the 130-hour standard as a monthly equivalent of 30 hours per week.
    Several commenters suggested that rather than calculating hours of 
service on a monthly basis, employers be permitted to determine hours 
of service on a payroll period basis using successive payroll periods 
as approximations of calendar months. This approach would be 
problematic, however, because payroll periods generally are not evenly 
divisible by the twelve calendar months. For example, treating two 
successive standard two-week payroll periods as equivalent to a 
calendar month generally would leave two payroll periods per year 
unassigned, requiring the arbitrary assignment of those two extra 
payroll periods to two calendar months.
    The Treasury Department and the IRS anticipate that a significant 
majority of employers will use some form of the optional look-back 
measurement method described in these proposed regulations to identify 
full-time employees. Because the measurement periods must extend for at 
least three months, and may extend for as many as twelve months, the 
use of payroll periods to approximate months generally will not be 
necessary. However, for those using payroll periods, an adjustment may 
be needed at the beginning and end of the measurement period. The 
proposed regulations address this by permitting adjustments for cases 
in which the measurement period begins or ends in the middle of a 
payroll period. See section II.C.1. of this preamble.
B. Hours of Service Rules
1. In General
    Hours of service are used in determining whether an employee is a 
full-time employee for purposes of section 4980H, and in calculating an 
employer's FTEs. Section 4980H(c)(4)(B) provides that the ``Secretary, 
in consultation with the Secretary of Labor, shall prescribe 
regulations, rules, and guidance as may be necessary to determine the 
hours of service of an employee'', including for employees who are not 
compensated on an hourly basis. Notice 2011-36 suggested rules for 
determining hours of service for purposes of section 4980H. As required 
by section 4980H(c)(4)(B), the Treasury Department and the IRS 
consulted with the DOL about the definition of hours of service in 
developing the rules described in Notice 2011-36 and these proposed 
regulations. Consistent with existing DOL regulations and other 
guidance under the Affordable Care Act (for example, Notice 2010-44 
(2010-22 IRB 717)), and with Notice 2011-36, the proposed regulations 
provide that an employee's hours of service include the following: (1) 
Each hour for which an employee is paid, or entitled to payment, for 
the performance of duties for the employer; and (2) each hour for which 
an employee is paid, or entitled to payment by the employer on account 
of a period of time during which no duties are performed due to 
vacation, holiday, illness, incapacity (including disability), layoff, 
jury duty, military duty or leave of absence (29 CFR 2530.200b-2(a)).
    Several comments requested that the definition of hours of service 
exclude all hours of service for paid leave. The proposed regulations 
do not adopt these suggestions because they are not consistent with the 
DOL regulations or the general concept of when employees are credited 
with hours of service. Notice 2011-36 described a potential rule 
providing that, for any single continuous period during which the 
employee was paid or entitled to payment but performed no duties, no 
more than 160 hours of service would be counted as hours of service. A 
number of commenters on Notice 2011-36 requested that the 160-hour 
limit be removed because they viewed it as restrictive, and expressed 
concern about the potential negative impact on employees who are on 
longer paid leaves, such as maternity or paternity leave. In response, 
these proposed regulations remove the 160-hour limit on paid leave, so 
that all periods of paid leave must be taken into account.

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    For purposes of calculating an employee's average hours of service 
under the look-back measurement method, the proposed regulations would 
limit the number of hours that an employer that is an educational 
organization is required to take into account in a calendar year with 
respect to most periods of absence with zero hours of service (as 
described in section II.C.4 of this preamble). The limit is 501 hours 
based on a longstanding 501-hour limit that applies in a different but 
related context under the service crediting rules applicable to 
retirement plans which are familiar to and administered by many 
employers.
    For purposes of calculating an employee's hours of service, the 
proposed regulations provide rules for hourly employees and non-hourly 
employees, generally consistent with the approach outlined in Notice 
2011-36. For employees paid on an hourly basis, employers must 
calculate actual hours of service from records of hours worked and 
hours for which payment is made or due for vacation, holiday, illness, 
incapacity (including disability), layoff, jury duty, military duty or 
leave of absence. For employees not paid on an hourly basis, employers 
are permitted to calculate the number of hours of service under any of 
the following three methods: (1) Counting actual hours of service (as 
in the case of employees paid on an hourly basis) from records of hours 
worked and hours for which payment is made or due for vacation, 
holiday, illness, incapacity (including disability), layoff, jury duty, 
military duty or leave of absence; (2) using a days-worked equivalency 
method whereby the employee is credited with eight hours of service for 
each day for which the employee would be required to be credited with 
at least one hour of service under these service crediting rules; or 
(3) using a weeks-worked equivalency of 40 hours of service per week 
for each week for which the employee would be required to be credited 
with at least one hour of service under these service crediting rules. 
These equivalents are based on DOL regulations (29 CFR 2530.200b-2(a)), 
modified as described in this preamble and in the proposed regulations.
    Although an employer must use one of these three methods for 
counting hours of service for all non-hourly employees, under these 
proposed regulations, an employer need not use the same method for all 
non-hourly employees. Rather, an employer may apply different methods 
for different classifications of non-hourly employees, so long as the 
classifications are reasonable and consistently applied. In addition, 
an employer may change the method of calculating non-hourly employees' 
hours of service for each calendar year. For example, for all non-
hourly employees, an employer may use the actual hours worked method 
for the calendar year 2014, but may use the days-worked equivalency 
method for counting hours of service for the calendar year 2015.
    However, consistent with Notice 2011-36, these proposed regulations 
prohibit use of the days-worked or weeks-worked equivalency method if 
the result would be to substantially understate an employee's hours of 
service in a manner that would cause that employee not to be treated as 
a full-time employee. For example, an employer may not use a days-
worked equivalency in the case of an employee who generally works three 
10-hour days per week, because the equivalency would substantially 
understate the employee's hours of service as 24 hours of service per 
week, which would result in the employee being treated as not a full-
time employee. Rather, the number of hours of service calculated using 
the days-worked or weeks-worked equivalency method must reflect 
generally the hours actually worked and the hours for which payment is 
made or due.
    For purposes of identifying the employee as a full-time employee, 
all hours of service performed for all entities treated as a single 
employer under section 414(b), (c), (m), or (o) must be taken into 
account.
2. Services Performed Outside of the United States
    The proposed regulations provide that hours of service do not 
include hours of service to the extent the compensation for those hours 
of service constitutes foreign source income, consistent with the rules 
of Federal taxation for determining whether compensation for services 
is attributable to services performed within or outside the United 
States. Thus, hours of service generally do not include hours of 
service worked outside the United States. This rule applies without 
regard to the residency or citizenship status of the individual. 
Therefore, employees working overseas generally will not have hours of 
service, and will not qualify as full-time employees either for 
purposes of determining an employer's status as an applicable large 
employer or for purposes of determining and calculating any potential 
liability under section 4980H. However, all hours of service for which 
an individual receives U.S. source income are hours of service for 
purposes of section 4980H.
3. Teachers and Other Employees of Educational Organizations
    Several comments were submitted on behalf of teachers and other 
employees of schools, colleges, universities, and other educational 
organizations in response to the look-back measurement method. The 
comments noted that educational organizations present a special 
situation compared to other workplaces because they typically function 
on the basis of an academic year, which involves various extended 
periods in which the organization is not in session or is engaged in 
only limited classroom activities. Because the services of many of the 
employees of these educational organizations follow the academic year, 
many of the employees, while typically employed for at least 30 hours 
of service per week during the active portions of the academic year, 
are precluded from working (or from working normal hours) during 
periods when the organization is entirely or largely closed. The 
commenters were concerned that use of a 12-month measurement period for 
employees who provide services only during the active portions of the 
academic year could inappropriately result in these employees not being 
treated as full-time employees. The concern is that employees' average 
hours of service for the 12-month measurement period would be distorted 
(and employees therefore would be inappropriately treated as not full-
time employees) by averaging in the periods during or outside of the 
academic year (such as, typically, the summer months) during which 
teachers and other similarly situated employees of educational 
organizations may have no hours or only a few hours of required 
workplace attendance, because the institution is not in session or is 
engaged in only limited classroom activities. Traditional breaks in the 
academic or school year such as winter or spring breaks will often be 
periods of paid leave; in those cases employees will be required to be 
credited with hours of service under the general hours of service rules 
under the look-back measurement method. See section II.B.1 of this 
preamble.
    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 full-time employee for section 4980H. See

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section II.C.4. of the preamble. Comments are invited on any remaining 
issues relating to teachers, other educational organization employees, 
or industries with comparable circumstances.
4. Employees Compensated on a Commission Basis, Adjunct Faculty, 
Transportation Employees and Analogous Employment Positions
    One commenter expressed concern the hours of service framework 
underlying the measurement and stability periods did not reflect the 
wide variety of workplaces, schedules, and specific work patterns in 
different industries and sectors of the economy, and that, 
consequently, the look-back method could be misused to treat employees 
long considered full-time employees as not full-time employees. A 
number of commenters requested special rules for employees whose 
compensation is not based primarily on hours and employees whose active 
work hours may be subject to safety-related regulatory limits (for 
example, salespeople compensated on a commission basis or airline 
pilots whose flying hours are subject to limits). Generally, the 
commenters suggest determining whether such employees are full-time 
employees for purposes of section 4980H by using hourly standards that, 
for the relevant industries or occupations, would be equivalent to the 
30-hour and 130-hour standards applicable to other employees. Thus, for 
example, some commenters noted that educational organizations generally 
do not track the full hours of service of adjunct faculty, but instead 
compensate adjunct faculty on the basis of credit hours taught. Some 
comments suggested that hours of service for adjunct faculty should be 
determined by crediting three hours of service per week for each course 
credit taught. Others explained that some educational organizations 
determine whether an adjunct faculty member will be treated as a full-
time employee by comparing the number of course credit hours taught by 
the adjunct faculty member to the number of credit hours taught by 
typical non-adjunct faculty members working in the same or a similar 
discipline who are considered full-time employees. Commenters on behalf 
of airline pilots noted that the number of hours of service that a 
pilot is permitted to operate an aircraft is limited under Federal law. 
The commenters requested that the guidance provide lower hourly 
standards for pilots that would be treated as equivalent to the 30-hour 
per week or 130-hour per month standard, or alternatively establish a 
special rule treating pilots as full-time employees regardless of their 
hours of service.
    The rules for counting hours of service and applying equivalents 
contained in the proposed regulations should assist in addressing some 
of the concerns raised in the comments. The Treasury Department and the 
IRS are continuing to consider, and invite further comment on, how best 
to determine the full-time status of employees in the circumstances 
described in the preceding paragraph and in other circumstances that 
may present similar difficulties in determining hours of service. 
Further guidance to address potentially common challenges arising in 
determining hours of service for certain categories of employees may be 
provided in the final regulations, or through Revenue Procedures, or 
other forms of subregulatory guidance.
    Until further guidance is issued, employers of employees in 
positions described in the first paragraph of this section II.B.4. of 
this preamble (and in other positions that raise similar issues with 
respect to the crediting of hours of service) must use a reasonable 
method for crediting hours of service that is consistent with the 
purposes of section 4980H. A method of crediting hours would not be 
reasonable if it took into account only some of an employee's hours of 
service with the effect of recharacterizing, as non-fulltime, an 
employee in a position that traditionally involves more than 30 hours 
of service per week. For example, it would not be a reasonable method 
of crediting hours to fail to take into account travel time for a 
travelling salesperson compensated on a commission basis, or in the 
case of an instructor, such as an adjunct faculty member, to take into 
account only classroom or other instruction time and not other hours 
that are necessary to perform the employee's duties, such as class 
preparation time.
C. Look-Back Measurement Method for Determination of Full-Time 
Employees
    As described in section III.A. of this preamble, the assessable 
payment under section 4980H(a) and section 4980H(b) is computed for 
each applicable large employer member. The potential section 4980H(a) 
liability of an applicable large employer member is determined by 
reference to the number of full-time employees employed by that member 
for a given calendar month, and its potential section 4980H(b) 
liability is determined by reference to the number of full-time 
employees of that member with respect to whom an applicable premium tax 
credit or cost-sharing reduction is allowed or paid for a given 
calendar month. Section 4980H(c)(4)(A) provides that ``[t]he term 
``full-time employee'' means, with respect to any month, an employee 
who is employed on average at least 30 hours of service per week.'' As 
explained in Notice 2011-36 and subsequent notices, determining full-
time employee status on a monthly basis may cause practical 
difficulties for employers, employees, and Affordable Insurance 
Exchanges (Exchanges). For employers, these difficulties include 
uncertainty and inability to predictably identify which employees are 
full-time employees to whom coverage must be provided to avoid a 
potential section 4980H liability. This problem is particularly acute 
if employees have varying hours or employment schedules (for example, 
employees whose hours vary from month to month). A month-by-month 
determination may also result in employees moving in and out of 
employer coverage (and potentially Exchange coverage) as frequently as 
monthly. This result would be undesirable from both the employee's and 
the employer's perspective, and would also create administrative 
challenges for the Exchanges.
    To address these concerns, and to give employers flexible and 
workable options and greater predictability, Notice 2011-36, Notice 
2012-17, and Notice 2012-58 outlined a potential optional look-back 
measurement method as an alternative to a month-by-month method of 
determining full-time employee status. See the discussion in the 
Background section of this preamble. The response to this look-back 
measurement method generally was favorable. Most commenters supported 
the general structure of the method, although, some expressed concern 
that the potential difficulties in identifying full-time employees were 
overstated, that the look-back measurement method might be manipulated 
by employers, and that there was a need to prescribe rules that would 
address special workplace situations to ensure that certain classes of 
employees would be treated as full-time employees even though their 
hours might not result in full-time employee treatment under the look-
back measurement method described in Notice 2012-58. After considering 
all of the comments on the notices, the Treasury Department and the IRS 
have incorporated in the proposed regulations the optional look-back 
measurement method described and cross-referenced in Notice 2012-58,

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with modifications as described in this preamble. See Sec.  
601.601(d)(2).
    While the look-back measurement method prescribes minimum standards 
to facilitate the identification of full-time employees, employers 
always can treat more employees as eligible for coverage, or otherwise 
offer coverage more widely, than would be required to avoid an 
assessable payment under section 4980H, assuming they do so consistent 
with any other applicable law.
1. Look-Back Measurement Method for Ongoing Employees
    The proposed regulations define an ongoing employee as, generally, 
an employee who has been employed by an employer for at least one 
standard measurement period. For ongoing employees, the proposed 
regulations, consistent with Notice 2012-58, provide that an applicable 
large employer member has the option to determine each ongoing 
employee's full-time status by looking back at a measurement period (a 
defined time period of not less than three but not more than 12 
consecutive months, as chosen by the employer). The measurement period 
that the employer chooses to apply to ongoing employees is referred to 
as the standard measurement period. If the employer determines that an 
employee was employed on average at least 30 hours of service per week 
during the standard measurement period, then the employer treats the 
employee as a full-time employee during a subsequent stability period, 
regardless of the employee's number of hours of service during the 
stability period, so long as he or she remains an employee. The 
applicable large employer member, at its option, may also elect to add 
an administrative period between the measurement period and the 
stability period as part of this method.
    For an employee whom the employer determines to be a full-time 
employee during the standard measurement period, the stability period 
would be a period that immediately followed the standard measurement 
period (and any applicable administrative period), the duration of 
which would be at least the greater of six consecutive calendar months 
or the length of the standard measurement period. If the employer 
determines that the employee did not work full-time during the standard 
measurement period, the employer would be permitted to treat the 
employee as not a full-time employee during the immediately following 
stability period (which may be no longer than the associated standard 
measurement period).
    Generally, the standard measurement period and stability period 
selected by the applicable large employer member must be uniform for 
all employees; however, the applicable large employer member may apply 
different measurement periods, stability periods, and administrative 
periods for the following categories of employees: (1) Each group of 
collectively bargained employees covered by a separate collective 
bargaining agreement, (2) collectively bargained and non-collectively 
bargained employees, (3) salaried employees and hourly employees, and 
(4) employees whose primary places of employment are in different 
states. Notice 2012-58 had also included ``employees of different 
entities'' as a separate category of employees. However, because 
section 4980H generally is applied on an applicable large employer 
member-by-member basis, including the method of identifying full-time 
employees, there is no need for a distinct category for employees of 
different entities, as each such member is a separate entity. The 
applicable large employer member may change its standard measurement 
period and stability period for subsequent years, but generally may not 
change the standard measurement period or stability period once the 
standard measurement period has begun.
    Comments have included requests that, in the interest of 
administrative convenience, the regulations permit employers to adjust 
the starting and ending dates of their three-to-twelve-month 
measurement periods in order to avoid splitting employees' regular 
payroll periods. The proposed regulations accommodate these requests to 
begin and end measurement periods with the beginning and ending of 
regular payroll periods if each of the payroll periods is one week, two 
weeks, or semi-monthly in duration. Pursuant to this accommodation, 
employers may make certain adjustments at the beginning and end of the 
measurement period. For example, an employer using the calendar year as 
a measurement period could exclude the entire payroll period that 
included January 1 (the beginning of the year) if it included the 
entire payroll period that included December 31 (the end of that same 
calendar year), or, alternatively, could exclude the entire payroll 
period that included December 31 if it included the entire payroll 
period that included January 1.
    Because employers may need time between the end of the standard 
measurement period and the beginning of the associated stability period 
to determine which ongoing employees are eligible for coverage, and to 
notify and enroll employees, the proposed regulations, consistent with 
Notice 2012-58, allow an applicable large employer member the option of 
having an administrative period between the end of a measurement period 
and the start of a stability period. The administrative period may last 
up to 90 days. However, any administrative period between the standard 
measurement period and the stability period may neither reduce nor 
lengthen the measurement period or the stability period. Also, to 
prevent this administrative period from creating any potential gaps in 
coverage, it must overlap with the prior stability period, so that, for 
ongoing employees, during any such administrative period applicable 
following a standard measurement period, those employees who are 
enrolled in coverage because of their status as full-time employees 
based on a prior measurement period will continue to be covered.
2. New Employees
    These proposed regulations also provide rules for determining the 
full-time employee status of new employees, including an optional look-
back measurement method for certain new employees generally based upon 
the approach outlined in Notice 2012-58. The methods for new employees 
vary depending upon whether the new employees are reasonably expected 
to work full-time (and are not seasonal) or are variable hour employees 
or seasonal employees.
a. New Full-Time Employees
    The proposed regulations provide that, for an employee who is 
reasonably expected at his or her start date to be employed on average 
30 hours of service per week (and who is not a seasonal employee), an 
employer that sponsors a group health plan that offers coverage to the 
employee at or before the conclusion of the employee's initial three 
calendar months of employment will not be subject to an assessable 
payment under section 4980H by reason of its failure to offer coverage 
to the employee for up to the initial three calendar months of 
employment. This rule continues the approach outlined in Notice 2012-17 
and Notice 2012-58.
    Notice 2012-58 requested comments on whether the Treasury 
Department and the IRS should develop additional guidance for 
determining whether an employee is reasonably expected, as of the 
employee's start date, to be employed on average at least 30 hours of 
service per week or whether the employee is a variable hour employee.

[[Page 227]]

The commenters suggested that the following factors could be used to 
determine whether an employee is reasonably expected to be employed on 
average at least 30 hours of service per week: (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 Treasury Department and the IRS are 
continuing to consider whether such factors are appropriate or useful 
and welcome any additional comments on this issue.
b. Look-Back Measurement Method for New Variable Hour and Seasonal 
Employees
    If an applicable large employer member uses the look-back 
measurement method for its ongoing employees, the employer may also use 
the optional method for new variable hour employees and for seasonal 
employees. The proposed regulations, consistent with Notice 2012-58, 
provide that a new employee is a variable hour employee if, based on 
the facts and circumstances at the start date, it cannot be determined 
that the employee is reasonably expected to be employed on average at 
least 30 hours per week. A new employee who is expected to be employed 
initially at least 30 hours per week may be a variable hour employee 
if, based on the facts and circumstances at the start date, the period 
of employment at more than 30 hours per week is reasonably expected to 
be of limited duration and it cannot be determined that the employee is 
reasonably expected to be employed on average at least 30 hours per 
week over the initial measurement period. 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. See section IX.G. of 
the preamble for transition relief for the effective date of the rule 
described in the immediately preceding sentence.
    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 Sec.  
1.105-11(c)(2)(iii)(C)).
    The proposed regulations reserve the definition of seasonal 
employee, and provide that, as set forth in Notice 2012-58, employers 
are permitted, through 2014, to use a reasonable, good faith 
interpretation of the term seasonal employee for purposes of section 
4980H. It is not a reasonable good faith interpretation of the term 
seasonal employee to treat an employee of an educational organization, 
who works during the active portions of the academic year, as a 
seasonal employee. The Treasury Department and the IRS contemplate that 
the final regulations may add to the definition of seasonal employee a 
specific time limit in the form of a defined period. For example, the 
limit specified in the current safe harbor for treatment as a seasonal 
employee under regulations for self-insured medical reimbursement plans 
(see final sentence of Sec.  1.105-11(c)(2)(iii)(C)) could be adapted 
to the definition of seasonal employee in the final regulations by 
prescribing, in the interest of simplicity and clarity, a specific time 
limit of not more than six months. Comments are requested on this 
approach, including any necessary modifications for purposes of section 
4980H and any alternative approaches that should be considered.
    As provided in Notice 2012-58, in general, an employer may use both 
an initial measurement period of between three and 12 months (the same 
as allowed for ongoing employees) and an administrative period of up to 
90 days for variable hour and seasonal employees. However, the initial 
measurement period and the administrative period combined may not 
extend beyond the last day of the first calendar month beginning on or 
after the one-year anniversary of the employee's start date (totaling, 
at most, 13 months and a fraction of a month).
    If the employer complies with these requirements, no assessable 
payment under section 4980H will be due with respect to the variable 
hour or seasonal employee during the initial measurement period or the 
administrative period. Note that an employee or related individual is 
not considered eligible for minimum essential coverage under the 
employer's plan (and therefore may be eligible for a premium tax credit 
or cost-sharing reduction through an Exchange) during any period when 
coverage is not offered, including any measurement period or 
administrative period prior to when coverage takes effect, even if the 
employer is not subject to an assessable payment for this period.
    During the initial measurement period, the employer measures the 
hours of service for the new employee or seasonal employee and 
determines whether the employee was employed an average of 30 hours of 
service per week or more during this period. The stability period for 
that employee must be the same length as the stability period for 
ongoing employees. As in the case of a standard measurement period, if 
an employee is determined to be a full-time employee during the initial 
measurement period, the stability period must be a period of at least 
six consecutive calendar months that is no shorter in duration than the 
initial measurement period and that begins immediately after the 
initial measurement period (and any associated administrative period).
    If a new variable hour or seasonal employee is determined not to be 
a full-time employee during the initial measurement period, the 
employer is permitted to treat the employee as not a full-time employee 
during the stability period that follows the initial measurement 
period. This stability period must not be more than one month longer 
than the initial measurement period and, as explained herein, must not 
exceed the remainder of the standard measurement period (plus any 
associated administrative period) in which the initial measurement 
period ends. In these circumstances, allowing a stability period to 
exceed the initial measurement period by one month is intended to give 
additional flexibility to employers that wish to use a 12-month 
stability period for new variable hour and seasonal employees and an 
administrative period that exceeds one month. To that end, such an 
employer could use an 11-month initial measurement period (in lieu of 
the 12-month initial measurement period that would otherwise be 
required) and still comply with the general rule that the initial 
measurement period and administrative period combined may not extend 
beyond the last day of the

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first calendar month beginning on or after the one-year anniversary of 
the employee's start date.
    For purposes of applying the look-back measurement method, the 
proposed regulations provide that an employee's start date is the first 
date for which the employee would be required to be credited with at 
least one hour of service under the hours of service rules. See section 
II.B.1. of this preamble for a discussion of those rules. See also 
section II.C.4. of this preamble for a description of the proposed 
rules on when an employee who has experienced a period with no hours of 
service is treated as a newly rehired employee rather than as a 
continuing employee. As indicated, this rule applies solely for 
purposes of determining the employee's start date for determining hours 
of service under section 4980H, and not for determining the beginning 
of an employment relationship for any other purpose under the Code or 
other applicable law.
3. Change in Employment Status
    The proposed regulations address the treatment of new variable or 
seasonal employees who have a change in employment status during the 
initial measurement period (for example, in the case of a new variable 
hour employee who is promoted during the initial measurement period to 
a position in which employees are reasonably expected to be employed on 
average 30 hours of service per week). The proposed regulations define 
a change in employment status as a material change in the position of 
employment or other employment status that, had the employee begun 
employment in the new position or status, would have resulted in the 
employee being reasonably expected to be employed on average at least 
30 hours of service per week. The proposed regulations provide that a 
new variable hour or seasonal employee who has a change in employment 
status during an initial measurement period is treated as a full-time 
employee under section 4980H as of the first day of the fourth month 
following the change in employment status or, if earlier and the 
employee averages more than 30 hours of service per week during the 
initial measurement period, the first day of the first month following 
the end of the initial measurement period (including any optional 
administrative period applicable to the initial measurement period). 
The change in employment status rule only applies to new variable hour 
and seasonal employees. A change in employment status for an ongoing 
employee does not change the employee's status as a full-time employee 
or non full-time employee during the stability period.
4. Employees Rehired After Termination of Employment or Resuming 
Service After Other Absence
    An employee might work for the same applicable large employer on 
and off during different periods. For example, an employee's employment 
could terminate but the employee could later be rehired by the same 
employer. Alternatively, even without a termination of employment, 
there might be a continuous period during which an employee is not 
credited with any hours of service under the hours of service rules 
described in these proposed regulations (for example, in the case of a 
period of unpaid leave of absence). When such an employee is rehired or 
returns from unpaid leave, this raises the issue of whether the 
employee may be treated as a new employee. A number of commenters 
requested clarification regarding how to treat rehired employees, in 
particular whether employees who are rehired during a measurement 
period are treated as new hires or whether their prior service must be 
taken into account in determining their status. In addition, several 
commenters expressed concern that employers might terminate an employee 
with an intent to later rehire that employee in order to delay offering 
health coverage to employees working full-time.
    The proposed regulations include rules designed to prevent this 
type of period without credited hours of service from inappropriately 
restarting an employee's initial measurement period, or causing the 
employee to be subject to a new 90-day waiting period for new full-time 
employees. For example, a variable hour employee terminated near the 
end of his or her initial measurement period and then rehired shortly 
thereafter, if treated again as a new variable hour employee, could be 
left out of coverage for an entire new initial measurement period 
without resulting in 4980H liability.
    Under the proposed regulations, if the period for which no hours of 
service is credited is at least 26 consecutive weeks, an employer may 
treat an employee who has an hour of service after that period, for 
purposes of determining the employee's status as a full-time employee, 
as having terminated employment and having been rehired as a new 
employee of the employer. The employer may also choose to apply a rule 
of parity for periods of less than 26 weeks. Under the rule of parity, 
an employee may be treated as having terminated employment and having 
been rehired as a new employee if the period with no credited hours of 
service (of less than 26 weeks) is at least four weeks long and is 
longer than the employee's period of employment immediately preceding 
that period with no credited hours of service (with the length of that 
previous period determined with application to that period of these 
rules governing employee rehires or other resumptions of service). For 
example, under the optional rule of parity if an employee works three 
weeks for an applicable large employer, terminates employment, and is 
rehired by that employer ten weeks after terminating employment, that 
rehired employee is treated as a new employee because the ten-week 
period with no credited hours of service is longer than the immediately 
preceding three-week period of employment.
    Note that this rule applies solely for purposes of determining the 
full-time employee status for employers using the look-back measurement 
method and not for any other purpose under the Code or other applicable 
law (including for determining status as an applicable large employer 
and for applying the 90-day waiting period limitation under section 
2708 of the Affordable Care Act).
    For an employee who is treated as a continuing employee (as opposed 
to an employee who is treated as terminated and rehired), the 
measurement and stability period that would have applied to the 
employee had the employee not experienced the period of no credited 
hours of service would continue to apply upon the employee's resumption 
of service. For example, if the continuing employee returns during a 
stability period in which the employee is treated as a full-time 
employee, the employee is treated as a full-time employee upon return 
and through the end of that stability period. For this purpose, the 
proposed regulations provide that a continuing employee treated as a 
full-time employee will be treated as offered coverage upon resumption 
of services if the employee is offered coverage as of the first day 
that employee is credited with an hour of service, or, if later, as 
soon as administratively practicable.
    The proposed regulations propose a method for averaging hours when 
applying the look-back measurement method to measurement periods that 
include special unpaid leave. This method applies only to an employee 
treated as a continuing employee upon the resumption of services, and 
not to an employee treated as terminated and rehired. For this purpose, 
special

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unpaid leave refers to a period of unpaid leave subject to the Family 
and Medical Leave Act of 1993 (FMLA), Public Law 103-3, 20 U.S.C. 2601 
et seq., unpaid leave subject to the Uniformed Services Employment and 
Reemployment Rights Act of 1994 (USERRA), Public Law 103-353, 38 U.S.C. 
4301 et seq., and unpaid leave on account of jury duty.
    Under this proposed averaging method, the employer determines the 
average hours of service per week for the employee during the 
measurement period excluding special unpaid leave period and uses that 
average as the average for the entire measurement period. 
Alternatively, the employer may choose to treat employees as credited 
with hours of service for special unpaid leave at a rate equal to the 
average weekly rate at which the employee was credited with hours of 
service during the weeks in the measurement period that are not special 
unpaid leave.
    Additional requirements apply to employment break periods for 
employees of an educational organization (meaning an organization 
described in Sec.  1.170A-9(c)(1), whether or not described in section 
501(c)(3) and exempt under section 501(a), and an educational 
organization owned, controlled, or operated by a government entity (as 
defined in Sec.  54.4980H-1(a)(20)). For this purpose, an employment 
break period is a period of at least four consecutive weeks 
(disregarding special unpaid leave) during which an employee is not 
credited with an hour of service. As noted above, educational 
organizations are different than other workplaces because they 
typically function on the basis of an academic year, which involves 
various extended periods in which the organization is not in session or 
is engaged in only limited classroom activities. The proposed 
regulations provide that the educational organization must apply one of 
the methods in the preceding paragraph to employment break periods 
related to or arising out of non-working weeks or months under the 
academic calendar. Accordingly, the educational organization must 
either determine the average hours of service per week for the employee 
during the measurement period excluding the employment break period and 
use that average as the average for the entire measurement period, or 
treat employees as credited with hours of service for the employment 
break period at a rate equal to the average weekly rate at which the 
employee was credited with hours of service during the weeks in the 
measurement period that are not part of an employment break period. 
However, the educational organization is not required to credit an 
employee in any calendar year with more than 501 hours of service for 
any employment break period (although this 501-hour limit does not 
apply to, or take into account, hours of service required to be 
credited for special unpaid leave). The rules governing employment 
break period for educational organizations apply only to an employee 
treated as a continuing employee upon the resumption of services, and 
not to an employee treated as terminated and rehired.
    The Treasury Department and the IRS are considering whether final 
regulations should extend the employment break period rules described 
in the preceding paragraph to all employers (not only educational 
organizations) and request comments. Any such extension of the rule 
would not take effect prior to 2015. Comments are invited in particular 
on how the proposed averaging methods should apply to employment break 
periods or other periods of absence, how the proposed approach would 
affect employees and employers, and whether the proposed treatment of 
employment break periods would be appropriate.
    The proposed regulations also contain an anti-abuse rule to address 
practices that have the effect of circumventing or manipulating the 
application of the employee rehire rules.
5. New Short-Term Employees
    Notice 2012-58 requested comments on the application of section 
4980H to employees hired for short-term periods but expected to be 
employed on average 30 hours of service per week or more for the 
duration of the short-term employment. Section 4980H would not apply to 
full-time employees employed for three months or less because, if the 
applicable large employer member were otherwise offering coverage, the 
section 4980H assessable payment would not apply to a failure to offer 
coverage during that period. However, section 4980H issues may arise 
for short-term employment exceeding three months.
    Some comments were received requesting special rules for 
determining the full-time employee status of short-term employees. The 
Treasury Department and the IRS have been concerned that the potential 
for abuse and manipulation of any special rules addressing short-term 
employees might outweigh the considerations of avoiding churning and 
inefficiency associated with offering coverage to employees whose 
employment is anticipated to last, for example, no more than four or 
five months. Commenters that wish to submit additional comments on 
whether any special rules would be appropriate with respect to short-
term employees, and if so, whether there are any methods that could be 
used to determine the full-time status of these employees that are 
consistent with the provisions of section 4980H, are requested to take 
these concerns into account.
6. New Employees Hired Into High-Turnover Positions
    Notice 2012-58 also requested comments on the application of 
section 4980H to new hires of full-time employees in high-turnover 
positions. An employer that otherwise offers coverage is not subject to 
a section 4980H assessable payment with respect to an employee whose 
employment terminates within three months of the employee's start date. 
However, some commenters raised concerns that employers with employees 
working full-time in typically high-turnover positions who, because of 
the high turnover, have a high probability of not being employed for 
the entire measurement period (for example, employees, a significant 
portion of whom are expected to remain employed for more than three 
months, but not more than six months) will be required to offer 
coverage for only a relatively brief period of time for a significant 
portion of the high-turnover employees.
    The proposed regulations do not contain special rules for high-
turnover positions for several reasons. As noted by comments in 
response to Notice 2012-58, ``high-turnover'' is a category that would 
require a complex definition (for example, how to define classes of 
employees and how much turnover of employment would be required over 
what period) and that could be subject to manipulation. In addition, 
any special treatment that is provided for employees hired into a high-
turnover position could provide an incentive for employers to terminate 
employees to ensure that the position remains a high-turnover position 
under whatever standard was used to make that determination. Commenters 
who wish to provide additional comments on this issue are requested to 
address the concerns identified in this paragraph.
D. Temporary Staffing Agencies
1. Application of Rules to Temporary Staffing Agencies
    The Treasury Department and the IRS recognize that the application 
of section 4980H may be particularly challenging for temporary staffing 
agencies because of the distinctive nature of their

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employees' work schedules. In particular, several commenters discussed 
the challenges involved in applying the look-back measurement method to 
employees of temporary staffing agencies. It is anticipated that many 
new employees of temporary staffing agencies will be variable hour 
employees under the rules in these proposed regulations because, based 
on the facts and circumstances, their periods of employment at 30 or 
more hours per week are reasonably expected to be of limited duration 
with the potential for significant gaps between assignments, and there 
is often considerable uncertainty as to the likelihood and duration of 
assignments and as to whether an individual will accept any given 
assignment and will continue in it. For instance, as illustrated in 
Example 12 in Sec.  54.4980H-3(c)(5) of the proposed regulations, if an 
individual hired by a temporary staffing agency as its common law 
employee can be expected to be offered one or more assignments with 
different clients each generally lasting no more than two or three 
months, and if the agency can expect the clients to have different 
requests with respect to hours of service (some above and some below 30 
hours of service per week) and for there to be gaps of time between 
assignments during which the employee is not requested to provide 
services, then the employee generally would be a variable hour 
employee. For these and other reasons, it often cannot be determined 
that the employees are reasonably expected to be employed on average at 
least 30 hours per week over the initial measurement period.
    Some commenters have suggested that, in view of the structure of 
the employment relationship, employees of temporary staffing agencies 
should be deemed to be variable hour employees, or at least that a 
presumption of status as a variable hour employee be established in the 
regulations. While, as noted, the Treasury Department and the IRS agree 
that many employees of temporary staffing agencies will likely be 
variable hour employees, we do not anticipate that all employees of a 
temporary staffing agency are inherently variable hour employees 
(especially employees on longer-term assignments with predictable 
requests for hours of service, as may be the case, for example, with 
particularly high-skilled technical or professional workers). In 
addition, the Treasury Department and the IRS are concerned that such a 
conclusion or presumption could lead employers to purport to use 
temporary staffing agencies (or other staffing agencies that may 
attempt to fit within such a presumption) in situations in which the 
employer ``client'' is the individual's common law employer and the 
staffing agency is inserted solely in an attempt to avoid application 
of section 4980H.
    For these reasons, comments 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.
    For purposes of this discussion, a temporary staffing agency refers 
only to an entity that is the common law employer of the individual 
that is providing services to a client of the temporary staffing 
agency. For an illustration of the facts and circumstances under which 
a temporary staffing agency (rather than its client) is the 
individual's common law employer, see Rev. Rul. 70-630 (1970-2 CB 229). 
In considering any requests for special consideration for temporary 
staffing agencies or other staffing agencies, the Treasury Department 
and the IRS will take into account the factual nature of the common law 
analysis in determining who is the common law employer of the workers 
providing the services and the potential implications for other Code 
sections, including employment tax liability provisions, for which the 
determination of common law employer status is necessary. See Sec.  
601.601(d)(2).
2. Separation From Service and Employment Break Period Rules
    Commenters have also noted that, because of the intermittent nature 
of temporary staffing agency assignments, including employees' ability 
to accept or decline such assignments and the fact that some 
individuals are on multiple temporary staffing agencies' lists of 
potential workers, a temporary staffing agency may not be able in all 
cases to readily determine the date on which the individual separated 
from service as an employee of the agency. For instance, an individual 
may remain on an agency's list of potential workers even after the 
individual has decided (without necessarily informing the agency) not 
to take any further assignments from that agency. The Treasury 
Department and the IRS request comments on particular situations 
involving temporary staffing agencies that these proposed rules fail to 
address and on whether special consideration may be needed.
3. Anti-Abuse Rules
    The Treasury Department and the IRS are aware of various structures 
being considered under which employers might use temporary staffing 
agencies (or other staffing agencies) purporting to be the common law 
employer to evade application of section 4980H. In one structure, the 
employer (referred to in this section as the ``client'') would purport 
to employ its employees for only part of a week, such as 20 hours, and 
then to hire those same individuals through a temporary staffing agency 
(or other staffing agency) for the remaining hours of the week, thereby 
resulting in neither the ``client'' employer nor the temporary staffing 
agency or other staffing agency appearing to employ the individual as a 
full-time employee. In another structure, one temporary staffing agency 
(or other staffing agency) would purport to employ an individual and 
supply the individual as a worker to a client for only part of a week, 
such as 20 hours, while a second temporary staffing agency or other 
staffing agency would purport to employ the same individual and supply 
that individual as a worker to the same client for the remainder of the 
week, thereby resulting in neither the temporary staffing agencies or 
the other staffing agencies, nor the client, appearing to employ the 
individual as a full-time employee. The Treasury Department and the IRS 
anticipate that only in rare circumstances, if ever, would the 
``client'' under these fact patterns not employ the individual under 
the common law standard as a full-time employee. Rather, the Treasury 
Department and the IRS believe that the primary purpose of using such 
an arrangement would be to avoid the application of section 4980H.
    It is anticipated that the final regulations will contain an anti-
abuse rule to address the situations described in this section of the 
preamble. Under that anticipated rule, if an individual performs 
services as an employee of an employer, and also performs the same or 
similar services for that employer in the individual's purported 
employment at a temporary staffing agency or other staffing agency of 
which the employer is a client, then all the hours of service are 
attributed to the employer for purposes

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of applying section 4980H. Similarly, to the extent an individual 
performs the same or similar services for the same client of two or 
more temporary staffing agencies or other staffing agencies, it is 
anticipated that all hours of service for that client are attributed to 
the client, if the client is the common law employer, or, if not, one 
of the temporary staffing agencies (or other staffing agencies) that 
purports to employ the individual with respect to services performed 
for that client.

III. Compliance With Section 4980H--In General

A. No Aggregation in Determining Liability of an Applicable Large 
Employer Member
    The proposed regulations address the application of section 4980H 
to an applicable large employer member. As noted in section I.A.2. of 
this preamble, under section 4980H(c)(2), the determination of 
applicable large employer status is made on a controlled group basis 
applying the aggregation rules under section 414(b), (c), (m), and (o). 
Section 4980H(c)(2)(D) provides that, in calculating the liability 
under section 4980H(a), the applicable large employer, as determined 
applying these same aggregation rules, is permitted one reduction of 30 
full-time employees, and that the reduction must be allocated ratably 
among the members of the applicable large employer based on each 
member's number of full-time employees.
    The proposed regulations provide that, although applicable large 
employer status and the 30-employee reduction is determined on an 
aggregated basis, the determination of whether an employer is subject 
to an assessable payment and the amount of any such payment is 
determined on a member-by-member basis. Therefore, the liability for, 
and the amount of, any assessable payment under section 4980H is 
computed and assessed separately for each applicable large employer 
member, taking into account that member's offer of coverage (or lack 
thereof) and based on that member's number of full-time employees. For 
example, if a parent corporation owns 100 percent of all classes of 
stock of 20 subsidiary corporations, and the controlled group is an 
applicable large employer, each of the 21 members of this controlled 
group (the parent corporation plus 20 subsidiary corporations) is 
considered separately in computing and assessing a section 4980H 
payment. In addition, each of the 21 group members is liable only for 
its separate section 4980H assessable payment.
B. Certification of Payment of Subsidy
    Under section 4980H, an applicable large employer member is subject 
to an assessable payment if at least one full-time employee of that 
member has been certified to the member under section 1411 of the 
Affordable Care Act as having enrolled in a qualified health plan with 
respect to which a premium tax credit is allowed or paid. Section 
1411(a) of the Affordable Care Act gives the Secretary of Health and 
Human Services the authority to determine whether individuals are 
eligible to enroll in qualified health plans through the Exchange and 
whether they are eligible for a premium tax credit. It is anticipated 
that, in upcoming regulations to be proposed under section 1411(a) of 
the Affordable Care Act, the Department of Health and Human Services 
(HHS) will establish a process under which employees who have enrolled 
for a 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 will be certified to the employer and 
that, pursuant to the proposed regulations, the certification to the 
employer will consist of methods adopted by the IRS to provide this 
information to an employer as part of its determination of liability 
under section 4980H. Existing HHS regulations also provide for a 
separate process for notification of employers.

IV. Compliance With Section 4980H(a)

A. In General
    Section 4980H(a) provides that an applicable large employer is 
liable for an assessable payment under section 4980H(a) if, for any 
month, any full-time employee is certified to receive an applicable 
premium tax credit (section 4980H(c)(3)) or cost-sharing reduction and 
the applicable large employer fails to offer its full-time employees 
(and their dependents) the opportunity to enroll in minimum essential 
coverage (MEC) (as defined in section 5000A(f)) under an eligible 
employer-sponsored plan. If an employer offers MEC under an eligible 
employer-sponsored plan to its full-time employees (and their 
dependents), it will not be subject to the penalty under section 
4980H(a), regardless of whether the coverage it offers is affordable to 
the employees or provides minimum value. For any calendar month, an 
applicable large employer member may be liable for an assessable 
payment under section 4980H(a) or under section 4980H(b), but cannot be 
liable under both section 4980H(a) and section 4980H(b) for the same 
calendar month.
B. Offer of Coverage to the Employee and the Employee's Dependents
    Under section 4980H(a), an applicable large employer member is 
subject to an assessable payment if the member fails to offer its full-
time employees (and their dependents) the opportunity to enroll in MEC 
under an eligible employer-sponsored plan and any full-time employee 
receives a premium tax credit or cost-sharing reduction. Commenters 
have asked whether coverage must be offered to the employee's 
dependents, and if so, to which individuals the term ``dependents'' 
refers. Some commenters argued that an offer of dependent coverage is 
not required under section 4980H because the statutory reference to 
dependents is in parentheses, and others noted that the liability under 
section 4980H is triggered only by a full-time employee receiving a 
premium tax credit (regardless of whether any dependents are eligible 
for, or receive, a premium tax credit).
    The fundamental rules of statutory construction provide that effect 
must be given, to the extent possible, to every word, clause and 
sentence. See 2A Sutherland Statutory Construction 46:6 (7th ed. 2007). 
Applying these principles to the words ``employees (and their 
dependents),'' the language cannot be construed to mean only employees. 
To accept the commenters' argument that the statute requires an offer 
of coverage only to full-time employees would require ignoring the 
words ``and their dependents'' in their entirety. Accordingly, the 
proposed regulations provide that the words ``and their dependents'' in 
section 4980H refer to an offer of coverage to dependents.
    Section 4980H does not contain a statutory definition of the term 
dependents for purposes of the references to dependents in section 
4980H(a) and (b). The proposed regulations define an employee's 
dependents for purposes of section 4980H as an employee's child (as 
defined in section 152(f)(1)) who is under 26 years of age. A child 
attains age 26 on the 26th anniversary of the date the child was born. 
For example, a child born on April 10, 1986 attained age 26 on April 
10, 2012. Employers may rely on employees' representations concerning 
the identity and ages of the employees' children. The term dependents, 
as defined in these proposed regulations for purposes of section 4980H, 
does not include any individual other than children as

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described in this paragraph of the preamble, including an employee's 
spouse. Thus, an offer of coverage to an employee's spouse is not 
required for purposes of section 4980H because section 4980H refers 
only to dependents (and not spouses). This definition of dependents 
applies only for purposes of section 4980H and does not apply for 
purposes of any other section of the Code. But see section IX.F. of the 
preamble for transition relief with respect to the requirement to offer 
coverage to dependents.
C. Offer of Coverage
1. In General
    For an employee to be treated as having been offered coverage for a 
month (or any day in that month), the coverage offered, if accepted, 
must be applicable for that month (or that day). These regulations 
clarify that if an applicable large employer member fails to offer 
coverage to a full-time employee for any day of a calendar month during 
which the employee was employed by the employer, the employee is 
treated as not being offered coverage during that entire month. 
However, in a calendar month when a full-time employee terminates 
employment, 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 
month.
    Several commenters requested clarification of what an employer 
would be required to provide to adequately demonstrate that it had 
offered coverage to an employee. These regulations do not propose any 
new specific rules for demonstrating that an offer of coverage was 
made. The otherwise generally applicable substantiation and 
recordkeeping requirements in section 6001 would apply, including Rev. 
Proc. 98-25 (1998-1 CB 689), (see Sec.  601.601(d)(2)(ii)(b) of this 
chapter). In addition, the provision of the offer generally could be 
made electronically. Section 1.401(a)-21 provides a safe harbor method 
for use of electronic media. See also Notice 99-1 (1999-1 CB 269).
    However, these regulations provide that if an employee has not been 
offered an effective opportunity to accept coverage, the employee will 
not be treated as having been offered the coverage for purposes of 
section 4980H. The employee must also have an effective opportunity to 
decline an offer of coverage that is not minimum value coverage or that 
is not affordable. Thus, an employer may not render an employee 
ineligible for a premium tax credit by providing an employee with 
mandatory coverage (that is, coverage which the employee is not offered 
an effective opportunity to decline) that does not meet minimum value. 
For an analogous provision relating to the effective opportunity to 
participate (or refuse participation) in an employee benefit 
arrangement, see Sec.  1.401(k)-1(e)(2)(ii).
2. Offer of Coverage in the Case of Nonpayment or Late Payment of 
Premiums
    Some commenters noted that in certain instances the employee share 
of the premium is not collected through withholding from the employee's 
salary but instead is billed to the employee. This may arise, for 
example, with respect to tipped employees, and may apply with respect 
to employees who were full-time employees during a measurement period 
but who work very few hours during the corresponding stability period. 
These commenters stated that in some instances employees do not pay 
their share of the premium on a timely basis and requested guidance on 
whether the employer would still be required to continue to provide 
coverage to those employees to avoid potential liability under section 
4980H. The proposed regulations provide that, if an employee enrolls in 
coverage but fails to pay the employee's share of the premium on a 
timely basis, the employer is not required to provide coverage for the 
period for which the premium is not timely paid, and that employer is 
treated as having offered that employee coverage for the remainder of 
the coverage period (typically the remainder of the plan year) for 
purposes of section 4980H. The regulations generally adopt the 
provisions applicable for purposes of payment for COBRA continuation 
coverage under Q&A-5 of Sec.  54.4980B-8, which generally provides a 
30-day grace period for payment and also provides rules with respect to 
timely payments that are not significantly less than the amount 
required to be paid and for responding to requests by health care 
providers for confirmation of coverage during the grace period.
D. Section 4980H(a) Relief for Failure To Offer Coverage to a Limited 
Number of Full-time Employees
    Section 4980H(a) liability is predicated on an applicable large 
employer member failing to offer its full-time employees (and their 
dependents) the opportunity to enroll in minimum essential coverage 
under an employer-sponsored plan. If section 4980H(a) liability is 
triggered, the amount of the assessable payment is determined by 
reference to a member's total number of full-time employees (including 
full-time employees offered employer-sponsored coverage). The Treasury 
Department and the IRS contemplate that the assessable payment should 
not apply in the case of a member that intends to offer coverage to all 
its full-time employees, but fails to offer coverage with respect to a 
few full-time employees. Notice 2011-36 initially addressed this issue 
by indicating that the Treasury Department and the IRS were 
contemplating providing in the proposed regulations that an employer 
offering coverage to all, or substantially all, of its full-time 
employees would not be subject to a section 4980H(a) assessable 
payment. Commenters generally welcomed the prospect of some flexibility 
or margin in lieu of an absolute standard that the employer offer 
coverage to all full-time employees (and their dependents). Many 
comments supported a ``substantially all'' standard, but many requested 
that the regulations prescribe a more definitive rule, specifying a 
particular percentage of full-time employees and their dependents (with 
comments suggesting various percentages) who need not be offered 
coverage for this purpose.
    After further study and consideration of the comments, the Treasury 
Department and the IRS believe that they should exercise their 
administrative authority to allow recognition of a margin of error 
consistent with an intent to recognize the possibility of inadvertent 
errors together with the specificity and administrability of a specific 
percentage, and therefore have concluded that a clear and definitive 95 
percent standard would be an administrable and appropriate 
interpretation of the statutory provision. Accordingly, the proposed 
regulations provide that an applicable large employer member will be 
treated as offering coverage to its full-time employees (and their 
dependents) for a calendar month if, for that month, it offers coverage 
to all but five percent or, if greater, five of its full-time employees 
(provided that an employee is treated as having been offered coverage 
only if the employer also offered coverage to that employee's 
dependents). The alternative margin of five full-time employees (and 
their dependents), if greater than five percent of full-time employees 
(and their dependents), is designed to accommodate relatively small 
applicable large employer members because a failure to offer coverage 
to a

[[Page 233]]

handful of full-time employees (and their dependents) might exceed five 
percent of the applicable large employer member's full-time employees. 
This relief applies to a failure to offer coverage to the specified 
number or percentage of employees (and their dependents), regardless of 
whether the failure to offer was inadvertent.
E. Application of the Section 4980H(c)(2)(D) 30-Employee Reduction
    Section 4980H(c)(2)(D)(i) provides that the number of individuals 
employed by an applicable large employer as full-time employees during 
any month shall be reduced by 30 solely for purposes of calculating the 
assessable payment under section 4980H(a) and the overall limit on the 
liability under section 4980H(b)(2) for any calendar month (which is 
equal to the product of the applicable payment amount described in 
section 4980H(c)(1) and the number of individuals employed by the 
employer as full-time employees during that calendar month). Section 
4980H(c)(2)(D)(ii) further provides that in the case of persons treated 
as a single applicable large employer under the aggregation rules, only 
one 30-employee reduction is allowed with respect to those persons and 
the reduction is allocated among them ratably on the basis of the 
number of full-time employees employed by each. If an applicable large 
employer has more than 30 applicable large employer members, with some 
or all of the applicable large employer members receiving a ratable 
allocation of more than zero but less than one full-time employee, the 
proposed regulations provide that the applicable large employer 
member's share of the 30-employee reduction will be rounded up to one 
full-time employee (which may result in an overall reduction to all 
members of the applicable large employer of more than 30 employees).
F. Section 4980H(a) Assessable Payment Amount
    The assessable payment amount under section 4980H(a) equals, with 
respect to any calendar month, the number of full-time employees of the 
applicable large employer member (reduced by the allocable share of the 
30-employee reduction) multiplied by the section 4980H(a) applicable 
payment amount. The initial section 4980H(a) applicable payment amount 
for a calendar month equals 1/12th of $2,000. For subsequent years, 
that amount is adjusted for inflation pursuant to section 4980H(c)(5) 
based upon the premium adjustment percentage (as defined in section 
1302(c)(4) of the Affordable Care Act) for the calendar year, rounded 
down to the next lowest multiple of $10.

V. Section 4980H(b) Liability

A. In General
    If an applicable large employer member offers its full-time 
employees (and their dependents) the opportunity to enroll in MEC under 
an eligible employer-sponsored plan but nonetheless one or more full-
time employees have been certified for the payment of an applicable 
premium tax credit or cost-sharing reduction, the employer generally is 
liable for a section 4980H(b) penalty based on the number of its full-
time employees receiving an applicable premium tax credit or cost-
sharing reduction. This may occur because (1) the coverage under the 
plan is unaffordable within the meaning of section 36(B)(c)(2)(C)(i) 
for the employee (and the employer does not meet the requirements of 
any of the affordability safe harbors described in section V.B.2. of 
this preamble), (2) the coverage under the plan does not provide 
minimum value within the meaning of section 36(B)(c)(2)(C)(ii), or (3) 
the employer offers coverage to at least 95 percent (or, if greater, 
five) but less than 100 percent of its full-time employees (and to 
those employees' dependents) and one or more of those employees who are 
not offered coverage receive a premium tax credit or cost-sharing 
reduction. See section IV of the preamble; see also section 
36B(c)(2)(C) and Sec.  1.36B-2(c)(3). Regulations under section 36B 
were published on May 23, 2012 (77 FR 30377), as corrected on July 13, 
2012 (77 FR 41270).
B. Affordable Coverage
1. In General
    Generally, section 4980H(b) liability may arise because, with 
respect to a full-time employee who has been certified to the employer 
as having received an applicable premium tax credit or cost-sharing 
reduction, the employer's coverage is unaffordable within the meaning 
of section 36B(c)(2)(C)(i) or does not provide minimum value within the 
meaning of section 36B(c)(2)(C)(ii). Therefore, section 4980H(b) 
effectively creates an affordability test based on section 36B 
affordability. For purposes of eligibility for the premium tax credit, 
coverage for an employee under an employer-sponsored plan is affordable 
if the employee's required contribution (within the meaning of section 
5000A(e)(1)(B)) for self-only coverage does not exceed 9.5 percent of 
the employee's household income for the taxable year. See sections 
36B(c)(2)(C)(i) and 36B(d)(2), and section III.C. of the preamble.
    As noted in of the Background section of the preamble, Notice 2011-
73 (2011-40 IRB 474) outlined a proposed affordability safe harbor 
(referred to as the Form W-2 safe harbor) in connection with the 
assessable payment under section 4980H(b) and requested comments on 
other potential safe harbors. The comments with respect to the proposed 
safe harbor generally were favorable and some commenters outlined other 
potential safe harbors they argued could assist employers in their 
efforts to determine affordability of coverage for purposes of section 
4980H. See also Notice 2012-58 regarding reliance on the Form W-2 safe 
harbor for 2014. In response to the comments, the proposed regulations 
provide for the Form W-2 safe harbor and two additional safe harbors 
for determining affordability, as described in section V.B.2. of the 
preamble.
2. Affordability Safe Harbors
    The three section 4980H(b) affordability safe harbors, as described 
in this preamble and incorporated into the proposed regulations, would 
apply only for purposes of determining whether an employer's coverage 
satisfies the 9.5 percent affordability test for purposes of the 
assessable payment under section 4980H(b). The section 4980H(b) safe 
harbors do not apply for purposes of determining the assessable payment 
under section 4980H(a). The safe harbors also would not affect an 
employee's eligibility for a premium tax credit under section 36B, 
which would continue to be based on the cost of employer-sponsored 
coverage relative to an employee's household income. Accordingly, in 
some instances, the effect of the safe harbor could be to treat an 
employer's offer of coverage to an employee as affordable (based on 
Form W-2 wages or one of the other affordability safe harbor standards) 
for purposes of determining whether the employer is subject to an 
assessable payment under section 4980H(b), while that same offer of 
coverage could be treated as unaffordable (based on household income) 
for purposes of determining whether the employee is eligible for a 
premium tax credit under section 36B.
    These safe harbors are all optional. An employer may choose to use 
one or more of these safe harbors for all its employees or for any 
reasonable category of employees, provided it does so on a uniform and 
consistent basis for all employees in a category.

[[Page 234]]

a. Form W-2 Safe Harbor
    The proposed regulations provide a safe harbor under which an 
employer could determine affordability for purposes of section 4980H(b) 
liability by reference to an employee's wages from that employer. Under 
this proposed regulation, wages for this purpose would be the total 
amount of wages as defined in section 3401(a), which is the amount 
required to be reported in Box 1 of Form W-2, Wage and Tax Statement 
(referred to in this preamble as Form W-2 wages).
    For the proposed Form W-2 wages safe harbor to apply, an employer 
must meet certain requirements, including: (1) That the employer offers 
its full-time employees (and their dependents) the opportunity to 
enroll in minimum essential coverage under an eligible employer-
sponsored plan; and (2) that the required employee contribution toward 
the self-only premium for the employer's lowest cost coverage that 
provides minimum value (the employee contribution) not exceed 9.5 
percent of the employee's Form W-2 wages for that calendar year. For 
this purpose, an employer may count wages paid to its employees by a 
third party that are reported on a Form W-2 that reflects the third 
party's EIN, for example because the Form W-2 was filed by an agent 
designated under section 3504 of the Code, or because the third party 
paying the wages was treated as the employer for employment tax 
purposes under section 3401(d)(1). If the employer satisfies both of 
these requirements for a particular employee (as well as any other 
conditions for the safe harbor), the employer will not be subject to an 
assessable payment under section 4980H(b) with respect to that 
particular employee, even if that employee receives a premium tax 
credit or cost sharing reduction because the employee's actual 
household income was less than the Form W-2 wages and, based on that 
household income, the coverage offered was not affordable.
    Application of this safe harbor is determined after the end of the 
calendar year and on an employee-by-employee basis, taking into account 
the employee's Form W-2 wages from the employer and the employee 
contribution. So, for example, the employer determines whether it met 
the Form W-2 safe harbor for 2014 for an employee by looking at that 
employee's 2014 Form W-2 wages (meaning the wages reported on the 2014 
Form W-2 that generally is furnished to the employee in January 2015) 
and comparing 9.5 percent of that amount to the employee's 2014 
employee contribution. Although the determination of whether an 
employer actually satisfied the safe harbor is made after the end of 
the calendar year, an employer could also use the safe harbor 
prospectively, at the beginning of the year, to set the employee 
contribution at a level so that the employee contribution for each 
employee would not exceed 9.5 percent of that employee's Form W-2 wages 
for that year (for example, by automatically deducting 9.5 percent, or 
a lower percentage, from an employee's Form W-2 wages for each pay 
period). See also the rate of pay affordability safe harbor and the 
Federal poverty line safe harbor, discussed in section V.B.2. of this 
preamble.
    In response to Notice 2011-73, several commenters noted that Box 1 
of the Form W-2 excludes elective deferrals that an employee makes into 
a section 401(k) plan or section 403(b) plan, and excludes amounts that 
an employee elects to contribute to a section 125 cafeteria plan 
through salary reduction (for example, for health insurance 
premiums,\4\ health flexible spending arrangements, dependent care 
assistance, or health savings accounts). The commenters contended that 
the measure of an employee's total compensation for purposes of the 
affordability safe harbor calculation should include the employee's 
elective deferrals to a retirement savings plan or cafeteria plan. The 
proposed regulations do not adopt this comment. The determination of 
whether employer-sponsored coverage is affordable for an employee under 
section 36B(c)(2)(C)(i) is based on modified adjusted income and does 
not take into account any elective deferrals to a section 401(k), 
section 403(b) or cafeteria plan. Given that these amounts are not 
taken into account in determining the affordability of coverage for 
purposes of an employee's eligibility for a section 36B credit, it 
would be inconsistent to allow employers to add back those amounts in 
determining their liability under section 4980H(b), which is linked to 
that employee's section 36B credit. However, see the rate of pay 
affordability safe harbor described in this section V.B.2. of the 
preamble, which could be used regardless of the amount of an employee's 
elective deferrals.
---------------------------------------------------------------------------

    \4\ As a practical matter, if an employee makes a salary 
reduction to pay for employer-provided MEC and thus is actually 
receiving the employer-provided MEC, the employee will not be 
eligible to receive the section 36B credit for that period. See 
section 36B(c)(2)(C)((iii).
---------------------------------------------------------------------------

    Notice 2011-73 also requested comments on how wages and employee 
contributions would need to be determined for employees employed for 
less than a full year by an employer (for example, a new employee hired 
during the calendar year or an employee who terminated employment 
during the calendar year) or an employee who was not offered coverage 
for the full year (for example, a new employee hired during the 
calendar year or an employee who switches positions of employment 
during the calendar year and so becomes eligible for coverage). Under 
section 36B, affordability for a part-year period is determined by 
comparing annual income to an annualized premium. See Sec.  1.36B-
2(c)(3)(v)(B). However, using this test to determine liability under 
section 4980H(b) could, in certain cases, result in penalizing 
employers that offer coverage that would be affordable based on the 
wages paid to, and premiums charged to, an employee for a given period. 
For example, if an employee was employed for six months of a calendar 
year by an employer, and offered coverage for those six months with an 
employee premium that did not exceed 9.5 percent of the employee's 
wages for those six months, and if the employee was not employed by the 
employer or any other employer for the other six months of the calendar 
year, the annualized premium may be higher than 9.5 percent of the 
employee's Form W-2 wages for the year. Commenters on Notice 2011-73 
recommended several approaches, including prorating wages and premiums, 
using a reasonable estimate of Form W-2 wages for the year, and 
applying the safe harbor on a month-by-month basis.
    The proposed regulations address this issue by providing that, for 
an employee who was not a full-time employee for the entire calendar 
year, the Form W-2 safe harbor is applied by adjusting the employee's 
Form W-2 wages to reflect the period when the employee was offered 
coverage, and then comparing those adjusted wages to the employee share 
of the premium during that period. Specifically, the amount of the 
employee's compensation for purposes of the safe harbor is determined 
by multiplying the wages for the calendar year by a fraction equal to 
the months for which coverage was offered to the employee over the 
months the employee was employed. That adjusted wage amount is then 
compared to the employee share of the premium for the months that 
coverage was offered to determine whether the Form W-2 safe harbor was 
satisfied for that employee. For example, if the employee worked eight 
months of a calendar year, during five months of which the employee was

[[Page 235]]

offered coverage, and received a Form W-2 reflecting Form W-2 wages of 
$24,000, the adjusted wages would be $24,000 multiplied by \5/8\ or 
$15,000. That $15,000 is then treated as the adjusted Form W-2 wages 
for purposes of determining whether the employee share of the premium 
for each of the five months of coverage offered was affordable under 
the section 4980H safe harbor (meaning the employee would be treated 
for this purpose as earning $3,000 per month during that five-month 
period).
b. Rate of Pay Safe Harbor
    Notice 2011-73 requested comments on other possible safe harbor 
methods for determining the affordability of employer-sponsored 
coverage for purposes of section 4980H(b). Several commenters suggested 
a safe harbor that is based on a rate of pay (either the employer's 
lowest rate of pay or each employee's individual rate of pay). In 
response to these comments, the proposed regulations provide a rate of 
pay safe harbor under which the employer would (1) take the hourly rate 
of pay for each hourly employee who is eligible to participate in the 
health plan as of the beginning of the plan year, (2) multiply that 
rate by 130 hours per month (the benchmark for full-time status for a 
month under section 4980H), and (3) determine affordability based on 
the resulting monthly wage amount. Specifically, the employee's monthly 
contribution amount (for the self-only premium of the employer's lowest 
cost coverage that provides minimum value) is affordable if it is equal 
to or lower than 9.5 percent of the computed monthly wages (that is, 
the employee's applicable hourly rate of pay x 130 hours). For salaried 
employees, monthly salary would be used instead of hourly salary 
multiplied by 130. An employer may use this safe harbor only if, with 
respect to the employees for whom the employer applies the safe harbor, 
the employer did not reduce the hourly wages of hourly employees or the 
monthly wages of salaried employees during the year. The rate of pay 
safe harbor is a design-based safe harbor that should be easy for 
employers to apply and allows them to prospectively satisfy 
affordability without the need to analyze every employee's wages and 
hours.
c. Federal Poverty Line Safe Harbor
    Some commenters suggested that determinations of affordability 
should disregard employees whose income would qualify the employee for 
coverage under Medicaid (and, accordingly, would disqualify the 
employee from receiving the premium tax credit.) The suggestions 
reflect that employees who cannot receive a premium tax credit, which 
are not available by law to individuals with income below 100 percent 
of the Federal poverty line, cannot trigger 4980H(b) liability.
    In response to these suggestions, the proposed regulations provide 
that an employer may also rely on a design-based safe harbor using the 
Federal poverty line (FPL) for a single individual. Specifically, for 
purposes of section 4980H, employer-provided coverage offered to an 
employee is affordable if the employee's cost for self-only coverage 
under the plan does not exceed 9.5 percent of the FPL for a single 
individual. For households with families, the amount that is considered 
to be below the poverty line is higher, so using the amount for a 
single individual ensures that the employee contribution for affordable 
coverage is minimized. In the interest of administrative convenience, 
employers are permitted to use the most recently published poverty 
guidelines as of the first day of the plan year of the applicable large 
employer member's health plan.
C. Section 4980H(b) Assessable Payment Amount
    The assessable payment amount under section 4980H(b) equals, for 
any calendar month, the number of full-time employees of the applicable 
large employer member who receive an applicable premium tax credit or 
cost-sharing reduction multiplied by the section 4980H(b) applicable 
payment amount. The initial section 4980H(b) applicable payment amount 
for a calendar month equals 1/12th of $3,000. For subsequent years, 
that amount is adjusted for inflation pursuant to section 4980H(c)(5) 
based upon the premium adjustment percentage (as defined in section 
1302(c)(4) of the Affordable Care Act) for the calendar year, rounded 
down to the next lowest multiple of $10. Notwithstanding the foregoing, 
the assessable payment under section 4980H(b) cannot exceed the amount 
of the assessable payment that would have been imposed under section 
4980H(a) if the applicable large employer member had failed to offer 
coverage to its full-time employees (and their dependents). Also, for 
any employee for whom the employer satisfies at least one of the 
affordability safe harbors described in section V.B.2. of this 
preamble, the employer is not subject to an assessable payment under 
section 4980H(b) for that employee if the coverage offered to that 
employee otherwise satisfies minimum value.

VI. Assessment and Payment of Section 4980H Liability

    Each applicable large employer member is liable for its section 
4980H assessable payment, and is not liable for the section 4980H 
assessable payment of any other entity in the controlled group 
comprising the applicable large employer. With respect to a disregarded 
entity, as defined in Sec.  301.7701-2, the proposed regulations regard 
the entity for purposes of an assessable payment under section 4980H 
and for purposes of reporting under section 6056. Therefore, the 
assessable payment and reporting requirements are imposed on the 
disregarded entity, and not on the owner of the disregarded entity. See 
proposed Sec.  301.7701-2(c)(2)(v)(A)(5). These rules would also apply 
to a qualified subchapter S subsidiary. See proposed Sec.  1.1361-
4(a)(8)(i)(E).
    Any assessable payment under section 4980H is payable upon notice 
and demand and is assessed and collected in the same manner as an 
assessable penalty under subchapter B of chapter 68 of the Code. 
Pursuant to regulations to be issued by HHS, the IRS will follow 
procedures that ensure employers receive certification that one or more 
employees have received premium tax credits or cost-sharing reductions 
and are provided an opportunity to respond before the issuance of any 
notice and demand for payment.
    In complying with section 4980H, including relying on a look-back 
measurement method for determining full-time employees and non full-
time employees and safe harbor methods for determining affordability 
for purposes of section 4980H(b) (as described in sections II and 
V.B.2. of this preamble), applicable large employer members are 
responsible for insuring that they comply with the recordkeeping 
requirements in section 6001, including Rev. Proc. 98-25 (1998-1 CB 
689), (see Sec.  601.601(d)(2)(ii)(b) of this chapter).
    Pursuant to section 275(a)(6) regarding the nondeductibility of 
certain excise taxes, including those under chapter 43, an assessable 
payment imposed under section 4980H is not deductible.

VII. Information Reporting Under Section 6056

    Applicable large employer members are required to report certain 
information on employer-provided health coverage under section 6056. 
Reporting will begin in 2015 for coverage provided on or after January 
1,

[[Page 236]]

2014. Notice 2012-33 (2012-20 IRB 912) requests comments on section 
6056 information reporting. The Treasury Department and the IRS intend 
to publish separate proposed regulations implementing section 6056. For 
purposes of this reporting requirement, the proposed regulations are 
expected to apply to each applicable large employer member, as defined 
for purposes of section 4980H. The proposed regulations are also 
expected to align most definitions and rules so that, for example, if 
an employer is treated as offering coverage for a month for purposes of 
section 4980H, the employer would report the coverage was offered for 
that month.

VIII. Public Health Service Act Section 2708--The 90-Day Maximum 
Waiting Period

    Public Health Service Act (PHS Act) section 2708 provides that, for 
plan years beginning on or after January 1, 2014, a group health plan 
or health insurance issuer offering group health insurance coverage 
shall not apply any waiting period that exceeds 90 days. PHS Act 
section 2704(b)(4), ERISA section 701(b)(4), and Code section 
9801(b)(4) define a waiting period to be the period that must pass with 
respect to an individual before the individual is eligible to be 
covered for benefits under the terms of the plan. PHS Act section 2708 
does not require the employer to offer coverage to any particular 
employee or class of employees, including part-time employees; but 
merely prevents an otherwise eligible employee (or dependent) from 
having to wait more than 90 days before coverage becomes effective.
    Notice 2012-17 outlined various approaches under consideration with 
respect to both the 90-day waiting period limitation and the employer 
shared responsibility provisions under section 4980H,\5\ and invited 
comments on the approaches contained in the notice, including a request 
for comments on how rules relating to the potential look-back 
measurement method for determining the full-time status of employees 
under Code section 4980H should be coordinated with the 90-day waiting 
period limitation of PHS Act section 2708. Subsequent guidance, under 
Notice 2012-59, provided temporary guidance on compliance with PHS Act 
section 2708, and provided that this temporary guidance would remain in 
effect at least through the end of 2014.\6\
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    \5\ Department of Labor Technical Release 2012-01, IRS Notice 
2012-17, and HHS FAQs issued February 9, 2012.
    \6\ Department of Labor Technical Release 2012-02, IRS Notice 
2012-59, and HHS FAQs issued August 31, 2012.
---------------------------------------------------------------------------

IX. Transition Rules

A. Plans With Fiscal Year Plan Years
    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). In addition, these commenters observed that, in order to use the 
look-back measurement method to determine their employees' status as 
full-time employees for the 2013 plan year ending in 2014, employers 
with fiscal year plans would be required to determine the employees' 
hours of service for periods before the publication of these proposed 
regulations.
    In response to these concerns, transition relief is being provided 
for members of applicable large employer members with fiscal year 
plans. If an applicable large employer member maintains a fiscal year 
plan as of December 27, 2012, the relief applies with respect to 
employees of the applicable large employer member (whenever hired) who 
would be eligible for coverage, as of the first day of the first fiscal 
year of that plan that begins in 2014 (the 2014 plan year) under the 
eligibility terms of the plan as in effect on December 27, 2012. If an 
employee described in the preceding sentence is offered affordable, 
minimum value coverage no later than the first day of the 2014 plan 
year, no section 4980H assessable payment will be due with respect to 
that employee for the period prior to the first day of the 2014 plan 
year.
    While transition relief is provided with respect to all enrollees 
(and other eligible employees) in fiscal year plans, further relief is 
also provided for employers that have a significant percentage of their 
employees eligible for or covered under one or more fiscal year plans 
that have the same plan year as of December 27, 2012 and want to offer 
certain other employees coverage under these plans. Specifically, if an 
applicable large employer member has at least one-quarter of its 
employees covered under one or more fiscal year plans that have the 
same plan year as of December 27, 2012 or offered coverage under those 
plans to one-third or more of its employees during the most recent open 
enrollment period before December 27, 2012, no payment under section 
4980H will be due for any month prior to the first day of the 2014 plan 
year of that fiscal year plan with respect to employees who (1) are 
offered affordable, minimum value coverage no later than the first day 
of the 2014 plan year of the fiscal year plan, and (2) would not have 
been eligible for coverage under any group health plan maintained by 
the applicable large employer member as of December 27, 2012 that has a 
calendar year plan year. For purposes of this transition relief, an 
applicable large employer member may determine the percentage of its 
employees covered under the fiscal year plan or plans as of the end of 
the most recent enrollment period or any date between October 31, 2012 
and December 27, 2012.
    Employers using this transition relief will still be subject to the 
reporting requirements under section 6056 for the entire 2014 calendar 
year. The concerns described in this section of the preamble with 
respect to the application of section 4980H do not apply with respect 
to reporting by a fiscal year plan under section 6056. Because no 
section 4980H liability will occur whether or not a full-time employee 
is offered coverage during the portion of the 2013 plan year falling in 
2014, the applicable large employer may determine the full-time 
employees for that period for purposes of the section 6056 reporting 
requirements after the period has ended, using actual service data 
rather than the look-back measurement method, and use those 
determinations for the reporting required at the beginning of 2015 to 
cover the entire 2014 calendar year. In addition, the identification of 
whether the coverage offered provides minimum value and the employee 
portion of the applicable premium should be available to the employer 
in time to complete the required reporting. Therefore, because this 
reporting is essential to the administration of the premium tax credit 
under section 36B, applicable large employers will be required to 
report this information for the entire 2014 calendar year, even if 
during some calendar months in 2014 section 4980H liability will not 
apply due to application of the transition rules for fiscal year plan 
years.
    The Treasury Department and the IRS are developing appropriate 
transition rules for employees of employers with fiscal year plans to 
account for the fact that premium tax credits will first

[[Page 237]]

become available for the 2014 calendar year.
B. Salary Reduction Elections for Accident and Health Plans Provided 
Through Cafeteria Plans for Cafeteria Plan Years Beginning in 2013
    Many employers offer health plans to employees through salary 
reduction under a section 125 cafeteria plan. Generally, cafeteria plan 
elections must be made before the start of the plan year, and are 
irrevocable during the plan year. See proposed Sec.  1.125-2. However, 
the final regulations under Sec.  1.125-4 permit a cafeteria plan to 
provide for changes in elections in certain circumstances, such as for 
change in status events. An employer that wishes to permit such changes 
in elections must incorporate the rules in Sec.  1.125-4 in its written 
cafeteria plan.
    In 2014, employees of an applicable large employer member covered 
under their employer's health plan through salary reduction under their 
employer's cafeteria plan may wish to enroll in coverage through an 
Exchange and discontinue their employer's coverage. However, the 
availability of health plan coverage through an Exchange beginning in 
2014 does not constitute a change in status under Sec.  1.125-4. As a 
result, employees would not be permitted to change their salary 
reduction elections for accident and health coverage during the plan 
year to cease salary reduction under the cafeteria plan and purchase 
coverage through an Exchange. Conversely, to avoid the individual 
responsibility payment under section 5000A, employees not covered under 
their employer's health plan may wish to enroll in the plan beginning 
after December 31, 2013.
    The Treasury Department and the IRS have concluded that it is 
appropriate to provide transition relief from the election rules in 
proposed Sec.  1.125-2 with respect to salary reduction elections under 
a cafeteria plan for an employer-provided accident and health plan with 
a fiscal year beginning in 2013. This transition relief applies only to 
the revocation, modification, or commencement of salary reductions for 
accident and health coverage offered through a cafeteria plan of an 
employer with a cafeteria fiscal year plan beginning in 2013 (and does 
not apply to any other qualified benefit offered through a cafeteria 
plan).
    Thus, an applicable large employer member is permitted, at its 
election, to amend one or more of its written cafeteria plans to permit 
either or both of the following changes in salary reduction elections:
    (1) An employee who elected to salary reduce through the cafeteria 
plan for accident and health plan coverage with a fiscal plan year 
beginning in 2013 is allowed to prospectively revoke or change his or 
her election with respect to the accident and health plan once, during 
that plan year, without regard to whether the employee experienced a 
change in status event described in Sec.  1.125-4; and
    (2) An employee who failed to make a salary reduction election 
through his or her employer's cafeteria plan for accident and health 
plan coverage with a fiscal plan year beginning in 2013 before the 
deadline in proposed Sec.  1.125-2 for making elections for the 
cafeteria plan year beginning in 2013 is allowed to make a prospective 
salary reduction election for accident and health coverage on or after 
the first day of the 2013 plan year of the cafeteria plan, without 
regard to whether the employee experienced a change in status event 
described in Sec.  1.125-4.
    An applicable large employer member that wants to permit the change 
in election rules under this transition relief for fiscal plan years 
must incorporate these rules in its written cafeteria plan. Pursuant to 
proposed Sec.  1.125-1(c), a plan may be amended at any time on a 
prospective basis. Notwithstanding the general rule that amendments to 
cafeteria plans may only be effective prospectively from the date of 
the plan amendment, a cafeteria plan may be amended retroactively to 
implement these transition rules. The retroactive amendment must be 
made by December 31, 2014, and be effective retroactively to the date 
of the first day of the 2013 plan year of the cafeteria plan.
C. Measurement Periods for Stability Periods Starting in 2014
    Section 4980H is effective for months beginning after December 31, 
2013. Employers that intend to utilize the look-back measurement method 
for determining full-time status for 2014 will need to begin their 
measurement periods in 2013 to have corresponding stability periods for 
2014. The Treasury Department and the IRS recognize, however, that 
employers intending to adopt a 12-month measurement period, and in turn 
a 12-month stability period, will face time constraints in doing so. 
Consequently, solely for purposes of stability periods beginning in 
2014, employers may adopt a transition measurement period that is 
shorter than 12 months but that is no less than 6 months long and that 
begins no later than July 1, 2013 and ends no earlier than 90 days 
before the first day of the plan year beginning on or after January 1, 
2014 (90 days being the maximum permissible administrative period). For 
example, an employer with a calendar year plan could use a measurement 
period from April 15, 2013 through October 14, 2013 (six months), 
followed by an administrative period ending on December 31, 2013. An 
employer with a plan with a fiscal plan year beginning April 1 that 
also elected to implement a 90-day administrative period could use a 
measurement period from July 1, 2013 through December 31, 2013 (six 
months), followed by an administrative period ending on March 31, 2014. 
However, an employer with a fiscal plan year beginning on July 1, 2014 
must use a measurement period that is longer than 6 months in order to 
comply with the requirement that the measurement period begin no later 
than July 1, 2013 and end no earlier than 90 days before the stability 
period. For example, the employer could have a 10-month measurement 
period from June 15, 2013 through April 14, 2014, followed by an 
administrative period from April 15, 2014 through June 30, 2014. This 
transition relief is solely for the application of a stability period 
beginning in 2014 through the end of that stability period (including 
any portion of the stability period falling in 2015).
    Note that employers who use a full 12-month measurement period are 
not required to begin the measurement period by July 1, 2013. For 
example, an employer with a fiscal plan year beginning on November 1, 
2014 could use a 12-month measurement period from September 1, 2013 
through August 31, 2014, followed by an administrative period from 
September 1, 2014 through October 31, 2014.
    See section II.C.1. of this preamble for rules on changing 
measurement periods from year to year.
D. Applicable Large Employer Members Participating in Multiemployer 
Plans
    Several comments requested a special rule for employers 
participating in multiemployer plans in view of such plans' unique 
operating structures. Multiemployer plans are maintained pursuant to 
collective bargaining agreements, and have joint boards of trustees 
representing employees and employers. Each participating employer's 
relationship with the plan and the employee's participation in the plan 
differs from the typical single-employer-sponsored arrangement. For 
example, service at participating employers generally is aggregated to 
determine an employee's eligibility to participate in the multiemployer 
plan, even though the participating employers

[[Page 238]]

generally are not related. Because many of the collective bargaining 
agreements governing multiemployer plans provide that contributions be 
made to the multiemployer fund based on requirements other than hours 
worked, such as on a days worked, projects completed, or percentage of 
earnings basis, contributing employers may not be in a position to know 
how many hours any individual employee worked. This problem is 
exacerbated by the fact that covered employees often work for multiple 
employers and it is thus impracticable for any one employer, or the 
fund, to determine how many hours any individual employee worked. For 
these reasons, further comments are requested on how section 4980H 
should apply to employers participating in multiemployer plans.
    The transition rule described in this section X.D. applies through 
2014 for contributions made by applicable large employers participating 
in a multiemployer plan. The rule is intended to provide an 
administratively feasible means for employers that contribute to 
multiemployer plans to comply with section 4980H. If any assessable 
payment were due under section 4980H, it would be payable by a 
participating applicable large employer member and that member would be 
responsible for identifying its full-time employees for this purpose 
(which would be based on hours of service for that employer). If the 
applicable large employer contributes to one or more multiemployer 
plans and also maintains a single employer plan, the rule applies to 
each multiemployer plan but not to the single employer plan.
    Under this transition rule, an applicable large employer member 
will not be treated as failing to offer the opportunity to enroll in 
minimum essential coverage to a full-time employee (and the employee's 
dependents) for purposes of section 4980H(a), and will not be subject 
to a penalty under section 4980H(b) with respect to a full-time 
employee if (i) the employer is required to make a contribution to a 
multiemployer plan with respect to the full-time employee pursuant to a 
collective bargaining agreement or an appropriate related participation 
agreement, (ii) coverage under the multiemployer plan is offered to the 
full-time employee (and the employee's dependents), and (iii) the 
coverage offered to the full-time employee is affordable and provides 
minimum value. For purposes of the preceding sentence, whether the 
employee is a full-time employee is determined under section 
4980H(c)(4), whether coverage is affordable is determined under section 
36(c)(2)(C)(i), and whether coverage provides minimum value is 
determined under section 36B(c)(2)(C)(ii). Notwithstanding this 
transition relief, any waiting period for coverage under the plan must 
separately comply with 90-day limitation on waiting periods in section 
2708 of the Public Health Service Act. Further guidance under section 
2708 of the Public Health Service Act will address this limitation.
    For purposes of determining whether coverage under the 
multiemployer plan is affordable, employers participating in the plan 
may use any of the affordability safe harbors set forth in the proposed 
regulations (and described in section V.B.2. of this preamble). 
Coverage under a multiemployer plan will also be considered affordable 
with respect to a full-time employee if the employee's required 
contribution, if any, toward self-only health coverage under the plan 
does not exceed 9.5 percent of the wages reported to the qualified 
multiemployer plan, which may be determined based on actual wages or an 
hourly wage rate under the applicable collective bargaining agreement.
E. Applicable Large Employer Determination for 2014
    Section 4980H(c)(2) defines an applicable large employer with 
respect to a calendar year as an employer that employed an average of 
at least 50 full-time employees on business days during the preceding 
calendar year. For purposes of determining whether an employer is an 
applicable large employer, full-time equivalents (FTEs), which are 
determined based on the hours of service of employees who are not full-
time employees, are taken into account. For most employers, their 
status as an applicable large employer will be evident without the need 
for an actual employee calculation (for example, employers with a 
number of employees that is well in excess of the 50-employee 
threshold). However, for some employers (those sufficiently close to 
the 50-employee threshold), a calculation will be required and will be 
performed for the first time. The Treasury Department and the IRS have 
concluded that transition relief is appropriate for those employers 
because they will be becoming familiar with the applicable large 
employer determination method and applying it for the first time in 
2013. Specifically, transition relief is provided for purposes of the 
applicable large employer determination for the 2014 calendar year that 
allows an employer the option to determine its status as an applicable 
large employer by reference to a period of at least six consecutive 
calendar months, as chosen by the employer, in the 2013 calendar year 
(rather than the entire 2013 calendar year). Thus, an employer may 
determine whether it is an applicable large employer for 2014 by 
determining whether it employed an average of at least 50 full-time 
employees on business days during any consecutive six-month period in 
2013.
    This will allow these employers to choose to use either, or both, a 
period to prepare to count their employees and a period afterward to 
ascertain and implement the results of the determination. For example, 
an employer could use the period from January to February, 2013 to 
establish its counting method, the period from March through August, 
2013 to determine its applicable large employer status and, if it is an 
applicable large employer, the period from September through December, 
2013 to make any needed adjustments to its plan (or to establish a 
plan) in order to comply with section 4980H.
F. Coverage for Dependents
    A number of employers currently offer coverage only to their 
employees, and not to dependents. For these employers, expanding their 
health plans to add dependent coverage will require substantial 
revisions to their plans and to their procedures for administration of 
the plans. To provide employers sufficient time to implement these 
changes, it is appropriate to provide transition relief with respect to 
dependent coverage for plan years that begin in 2014. Accordingly, any 
employer that takes steps during its plan year that begins in 2014 
toward satisfying the section 4980H provisions relating to the offering 
of coverage to full-time employees' dependents will not be liable for 
any assessable payment under section 4980H solely on account of a 
failure to offer coverage to the dependents for that plan year.
G. Variable Hour Employee Definition
    The proposed regulations, consistent with Notice 2012-58, provide 
that a new employee is a variable hour employee if, based on the facts 
and circumstances at the start date, it cannot be determined that the 
employee is reasonably expected to be employed on average at least 30 
hours per week. A new employee who is expected to be employed initially 
at least 30 hours per week may be a variable hour employee if, based on 
the facts and circumstances at the start date, the period of employment 
at more than 30 hours per week is reasonably expected to be of

[[Page 239]]

limited duration and it cannot be determined that the employee is 
reasonably expected to be employed on average at least 30 hours per 
week over the initial measurement period. 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. The effective date of 
the rule described in the immediately preceding sentence is delayed 
until 2015 to provide transition relief because some plan sponsors may 
have interpreted Notice 2012-58 (which gave reliance for 2014) more 
broadly. Even with respect to 2014, however, the status of any 
individual employee as a variable hour employee cannot be based on 
employer expectations regarding aggregate turnover. Rather there must 
be objective facts and circumstances specific to the newly hired 
employee at the start date demonstrating that the individual employee's 
employment is reasonably expected to be of limited duration within the 
initial measurement period.

X. Effective Dates and Reliance

    Section 4980H is effective for months after December 31, 2013.
    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.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required.
    It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
this regulation, and because the regulation does not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before the proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. The Treasury Department and the IRS request comments on all 
aspects of the proposed rules. All comments will be available for 
public inspection and copying.
    A public hearing has been scheduled for April 23, 2013, beginning 
at 10:00 a.m. in the Auditorium, Internal Revenue Building, 1111 
Constitution Avenue NW, Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments by March 18, 2013, and an outline of the topics to be 
discussed and the time to be devoted to each topic (signed original and 
eight (8) copies) by April 3, 2013. A period of 10 minutes will be 
allotted to each person for making comments. An agenda showing the 
scheduling of the speakers will be prepared after the deadline for 
receiving outlines has passed. Copies of the agenda will be available 
free of charge at the hearing.

Drafting Information

    These proposed regulations were drafted by the Office of Tax Exempt 
and Government Entities. Other personnel from the Treasury Department 
and the IRS participated in the development of the regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 54

    Excise taxes, Pensions, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 54, and 301 are proposed to be amended 
as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 1.1361-4 is amended as follows:
0
1. In paragraph (a)(8)(i)(C), the language ``and 4412; and'' is removed 
and ``and 4412;'' is added in its place.
0
2. In paragraph (a)(8)(i)(D), the language ``or 6427.'' is removed and 
``or 6427; and'' is added in its place.
0
3. Paragraphs (a)(8)(i)(E) is added.
0
4. In paragraph (a)(8)(ii), the language ``January 1, 2008.'' is 
removed and ``January 1, 2008, except that paragraph (a)(8)(i)(E) of 
this section applies for months after December 31, 2013.'' is added in 
its place.
    The additions read as follows:


Sec.  1.1361-4  Effect of QSub election.

    (a) * * *
    (8) * * *
    (i) * * *
    (E) Assessment and collection of an assessable payment imposed by 
section 4980H and reporting required by section 6056.
* * * * *

PART 54--PENSION EXCISE TAXES

0
Par. 3. The authority citation for part 54 is amended by adding entries 
in numerical order to read as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 54.4980H-3 is also issued under 26 U.S.C. 
4980H(c)(4)(B).

0
Par. 4. Sections 54.4980H-0, 54.4980H-1, 54.4980H-2, 54.4980H-3, 
54.4980H-4, 54.4980H-5, and 54.4980H-6 are added to read as follows:


Sec.  54.4980H-0  Table of contents.

    This section lists the table of contents for Sec. Sec.  54.4980H-1 
through 54.4980H-6.

Section 54.4980H-1 Definitions.

    (a) Definitions.

[[Page 240]]

    (1) Administrative period.
    (2) Advance credit payment.
    (3) Affordable Care Act.
    (4) Applicable large employer.
    (5) Applicable large employer member.
    (6) Applicable premium tax credit.
    (7) Calendar month.
    (8) Church, or a convention or association of churches.
    (9) Collective bargaining agreement.
    (10) Cost sharing reduction.
    (11) Dependent.
    (12) Eligible employer-sponsored plan.
    (13) Employee.
    (14) Employer.
    (15) Exchange.
    (16) Federal poverty line.
    (17) Form W-2 wages.
    (18) Full-time employee.
    (19) Full-time equivalent employee (FTE).
    (20) Government entity.
    (21) Hour of service.
    (22) Initial measurement period.
    (23) Minimum essential coverage.
    (24) Minimum value.
    (25) Month.
    (26) New employee.
    (27) Ongoing employee.
    (28) Period of employment.
    (29) Person.
    (30) Plan year.
    (31) Predecessor employer.
    (32) Qualified health plan.
    (33) Seasonal employee.
    (34) Seasonal worker.
    (35) Section 1411 certification.
    (36) Section 4980H(a) applicable payment amount.
    (37) Section 4980H(b) applicable payment amount.
    (38) Self-only coverage.
    (39) Stability period.
    (40) Standard measurement period.
    (41) Start date.
    (42) United States.
    (43) Variable hour employee.
    (44) Week.
    (b) Effective/applicability date.

Section 54.4980H-2 Applicable large employer and applicable large 
employer member.

    (a) In general.
    (b) Determining applicable large employer status.
    (1) In general.
    (2) Seasonal worker exception.
    (3) Employers not in existence in preceding calendar year.
    (4) Special rules for government entities, churches, and 
conventions and associations of churches.
    (c) Full-time equivalent employees (FTEs).
    (1) In general.
    (2) Calculating the number of FTEs.
    (d) Examples.
    (e) Effective/applicability date.

Section 54.4980H-3 Determining full-time employees.

    (a) In general.
    (b) Hours of service.
    (1) Hourly employee calculation.
    (2) Non-hourly employee's calculation.
    (c) Look-back measurement method.
    (1) Ongoing employees.
    (2) New non-variable hour and non-seasonal employees.
    (3) New variable hour and new seasonal employees.
    (4) Transition from new employee to ongoing employee.
    (5) Examples.
    (d) Change in employment status.
    (1) In general.
    (2) Examples.
    (e) Employee rehires.
    (1) Treatment as a new employee.
    (2) Employment break period defined.
    (3) Special unpaid leave defined.
    (4) Averaging method for employment break periods and certain 
other unpaid leave.
    (5) Anti-abuse rule.
    (6) Examples.
    (f) Nonpayment or late payment of premiums.
    (g) Effective/applicability date.

Section 54.4980H-4 Assessable payments under section 4980H(a).

    (a) In general.
    (b) Offer of coverage.
    (c) Partial calendar month.
    (d) Allocated reduction of 30 full-time employees.
    (e) Example.
    (f) Effective/applicability date.

Section 54.4980H-5 Assessable payments under section 4980H(b).

    (a) In general.
    (b) Offer of coverage.
    (c) Partial calendar month.
    (d) Applicability to applicable large employer member.
    (e) Affordability.
    (1) In general.
    (2) Affordability safe harbors for section 4980H(b) purposes.

    (f) Effective/applicability date.

Section 54.4980H-6 Administration and procedure.

    (a) Reserved.
    (b) Effective/applicability date.


Sec.  54.4980H-1  Definitions.

    (a) Definitions. The definitions in this section apply to this 
section and Sec. Sec.  54.4980H-2 through 54.4980H-6.
    (1) Administrative period. The term administrative period is an 
optional period, selected by an applicable large employer member, of no 
longer than 90 days beginning immediately following the end of a 
measurement period and ending immediately before the start of the 
associated stability period.
    (2) Advance credit payment. The term advance credit payment means 
an advance payment of the premium tax credit as provided in Affordable 
Care Act section 1412 (42 U.S.C. 18082).
    (3) Affordable Care Act. The term Affordable Care Act means the 
Patient Protection and Affordable Care Act, Public Law 111-148 (124 
Stat. 119 (2010)), and the Health Care and Education Reconciliation Act 
of 2010, Public Law 111-152, (124 Stat. 1029 (2010)), as amended by the 
Medicare and Medicaid Extenders Act of 2010 Public Law 111-309 (124 
Stat. 3285 (2010)), the Comprehensive 1099 Taxpayer Protection and 
Repayment of Exchange Subsidy Overpayments Act of 2011, Public Law 112-
9 (125 Stat. 28, (2011)), the Department of Defense and Full-Year 
Continuing Appropriations Act, 2011, Public Law 112-10 (125 Stat. 38, 
(2011)), and the 3% Withholding Repeal and Job Creation Act, Public Law 
112-56 (125 Stat. 711 (2011)).
    (4) Applicable large employer. The term applicable large employer 
means, with respect to a calendar year, an employer that employed an 
average of at least 50 full-time employees (including full-time 
equivalent employees) on business days during the preceding calendar 
year. For rules relating to the determination of applicable large 
employer status, see Sec.  54.5980H-2.
    (5) Applicable large employer member. The term applicable large 
employer member means a person that, together with one or more other 
persons, is treated as a single employer that is an applicable large 
employer. For this purpose, if a person, together with one or more 
other persons, is treated as a single employer that is an applicable 
large employer on any day of a calendar month, that person is an 
applicable large employer member for that calendar month. If the 
applicable large employer comprises one person, that one person is the 
applicable large employer member. An applicable large employer member 
does not include a person that is not an employer or only an employer 
of employees with no hours of service for the calendar year. For rules 
for government entities, and churches, or conventions or associations 
of churches, see Sec.  54.4980H-2(b)(4).
    (6) Applicable premium tax credit. The term applicable premium tax 
credit means any premium tax credit that is allowed or paid under 
section 36B and any advance payment of such credit.
    (7) Calendar month. The term calendar month means one of the 12 
full months named in the calendar, such as January, February, or March.
    (8) Church, or a convention or association of churches. The term 
church, or a convention or association of churches has the same meaning 
as provided in Sec.  1.170A-9(b) of this chapter.
    (9) Collective bargaining agreement. The term collective bargaining 
agreement means an agreement that the Secretary of Labor determines to 
be a collective bargaining agreement, provided that the health benefits 
provided under the collective bargaining agreement are the subject of 
good faith bargaining between employee representatives and one or more 
employers, and the agreement between

[[Page 241]]

employee representatives and one or more employers satisfies section 
7701(a)(46).
    (10) Cost-sharing reduction. The term cost-sharing reduction means 
a cost-sharing reduction and any advance payment of the reduction as 
defined under section 1402 of the Affordable Care Act.
    (11) Dependent. The term dependent means a child (as defined in 
section 152(f)(1)) of an employee who has not attained age 26. A child 
attains age 26 on the 26th anniversary of the date the child was born. 
Absent knowledge to the contrary, applicable large employer members may 
rely on an employee's' representation about that employee's children 
and the ages of those children. Dependent does not include the spouse 
of an employee.
    (12) Eligible employer-sponsored plan. The term eligible employer-
sponsored plan has the same meaning as provided under section 
5000A(f)(2) and any applicable guidance thereunder.
    (13) Employee. The term employee means an individual who is an 
employee under the common-law standard. See Sec.  31.3401(c)-1(b) of 
this chapter. For purposes of this paragraph, a leased employee (as 
defined in section 414(n)(2)), a sole proprietor, a partner in a 
partnership, or a 2-percent S corporation shareholder is not an 
employee.
    (14) Employer. The term employer means the person that is the 
employer of an employee under the common-law standard. See Sec.  
31.3121(d)-1(c) of this chapter. For purposes of determining whether an 
employer is an applicable large employer, all persons treated as a 
single employer under section 414(b), (c), (m), or (o) are treated as a 
single employer. Thus, all employees of a controlled group of entities 
under section 414(b) or (c), an affiliated service group under section 
414(m), or under section 414(o) are taken into account in determining 
whether the members of the controlled group or affiliated service group 
together are an applicable large employer. For purposes of determining 
applicable large employer status, the term employer also includes a 
predecessor employer and a successor employer.
    (15) Exchange. The term Exchange means an Exchange as defined in 45 
CFR 155.20.
    (16) Federal Poverty Line. The term Federal poverty line means the 
most recently published poverty guidelines (updated periodically in the 
Federal Register by the Secretary of Health and Human Services under 
the authority of 42 U.S.C. 9902(2)) as of the first day of the plan 
year of the applicable large employer member's health plan.
    (17) Form W-2 wages. The term Form W-2 wages with respect to an 
employee refers to the amount of wages as defined under section 3401(a) 
for the applicable calendar year (required to be reported in Box 1 of 
the Form W-2) received from an applicable large employer.
    (18) Full-time employee. The term full-time employee means, with 
respect to a calendar month, an employee who is employed an average of 
at least 30 hours of service per week with an employer. For this 
purpose, 130 hours of service in a calendar month is treated as the 
monthly equivalent of at least 30 hours of service per week, provided 
the employer applies this equivalency rule on a reasonable and 
consistent basis. For rules on the determination of whether an employee 
is a full-time employee, including the look-back measurement method for 
purposes of determining and computing liability under section 4980H 
(but not for the purpose of determining status as an applicable large 
employer), see Sec.  54.4980H-3.
    (19) Full-time equivalent employee (FTE). The term full-time 
equivalent employee, or FTE, means a combination of employees, each of 
whom individually is not treated as a full-time employee because he or 
she is not employed on average at least 30 hours of service per week 
with an employer, who, in combination, are counted as the equivalent of 
a full-time employee solely for purposes of determining whether the 
employer is an applicable large employer. For rules on the method for 
determining the number of an employer's full-time equivalent employees, 
or FTEs, see Sec.  54.4980H-2(c).
    (20) Government entity. The term government entity means the 
government of the United States, any State or political subdivision 
thereof, any Indian tribal government (as defined in section 
7701(a)(40)) or subdivision of an Indian tribal government (determined 
in accordance with section 7871(d)), or any agency or instrumentality 
of any of the foregoing.
    (21) Hour of service--(i) In general. The term hour of service 
means each hour for which an employee is paid, or entitled to payment, 
for the performance of duties for the employer; and each hour for which 
an employee is paid, or entitled to payment by the employer for a 
period of time during which no duties are performed due to vacation, 
holiday, illness, incapacity (including disability), layoff, jury duty, 
military duty or leave of absence (as defined in 29 CFR 2530.200b-
2(a)). For the rules for determining an employee's hour of service, see 
Sec.  54.4980H-3.
    (ii) Service for other applicable large employer members. In 
determining hours of service and status as a full-time employee for all 
purposes under section 4980H, an hour of service for one applicable 
large employer member is treated as an hour of service for all other 
applicable large employer members for all periods during which the 
applicable large employer members are part of the same group of 
employers forming an applicable large employer.
    (iii) Service of a nonresident alien individuals and service 
outside the United States. Hours of service do not include hours of 
service to the extent the compensation for those hours of service 
constitutes income from sources without the United States (within the 
meaning of section 862(a)(3)).
    (22) Initial measurement period. The term initial measurement 
period means a time period selected by an applicable large employer 
member of at least three consecutive calendar months but not more than 
12 consecutive calendar months used by the applicable large employer as 
part of the process of determining whether certain new employees are 
full-time employees under the look-back measurement method in Sec.  
54.4980H-3(c). See Sec.  54.4980H-3(c)(1)(ii) for rules on pay periods 
including the beginning and end dates of the measurement period.
    (23) Minimum essential coverage. The term minimum essential 
coverage (or MEC) has the same meaning as provided in section 5000A(f) 
and any regulations or other administrative guidance thereunder.
    (24) Minimum value. The term minimum value has the same meaning as 
provided in section 36B(c)(2)(C)(ii) and any regulations or other 
administrative guidance thereunder.
    (25) Month. The term month refers to the period that begins on any 
date following the first day of a calendar month and that ends on the 
immediately preceding date in the immediately following calendar month 
(for example, from February 2 to March 1 or from December 15 to January 
14) or that is a calendar month. See Sec.  54.4980H-1(a)(7) for the 
definition of calendar month.
    (26) New employee. The term new employee means an employee who has 
been employed by an applicable large employer for less than one 
complete standard measurement period. For treatment of the employee as 
a new employee or ongoing employee following a period for which no 
hours of service are earned, see the

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employment break period rules at Sec.  54.4980H-3(e).
    (27) Ongoing employee. The term ongoing employee means an employee 
who has been employed by an applicable large employer member for at 
least one complete standard measurement period.
    (28) Period of employment. The term period of employment means the 
period of time beginning on the first date for which an employee is 
credited with an hour of service for an applicable large employer 
(including any member of that applicable large employer) and ending on 
the last date on which the employee is credited with an hour of service 
for that applicable large employer, both dates inclusive. An employee 
may have one or more periods of employment with the same applicable 
large employer.
    (29) Person. The term person has the same meaning as provided in 
section 7701(a)(1) and the regulations thereunder.
    (30) Plan year. The plan year must be twelve consecutive months, 
unless a short plan year of less than twelve consecutive months is 
permitted for a valid business purpose. A plan year is permitted to 
begin on any day of a year and must end on the preceding day in the 
immediately following year (for example, a plan year that begins on 
October 15, 2014, must end on October 14, 2015). A calendar year plan 
year is a period of twelve consecutive months beginning on January 1 
and ending on December 31 of the same calendar year. Once established, 
a plan year is effective for the first plan year and for all subsequent 
plan years, unless changed, provided that such change will only be 
recognized if made for a valid business purposes. A change in the plan 
year is not permitted if a principal purpose of the change in plan year 
is to circumvent the rules of section 4980H or these regulations.
    (31) Predecessor employer. [Reserved]
    (32) Qualified health plan. The term qualified health plan means a 
qualified health plan as defined in Affordable Care Act section 1301(a) 
(42 U.S.C. 18021(a)), but does not include a catastrophic plan 
described in Affordable Care Act section 1302(e) (42 U.S.C. 18022(e)).
    (33) Seasonal employee. [Reserved]
    (34) Seasonal worker. The term seasonal worker means a worker who 
performs labor or services on a seasonal basis as defined by the 
Secretary of Labor, including (but not limited to) workers covered by 
29 CFR 500.20(s)(1), and retail workers employed exclusively during 
holiday seasons. Employers may apply a reasonable, good faith 
interpretation of the term ``seasonal worker'' and a reasonable good 
faith interpretation of 29 CFR 500.20(s)(1) (including as applied by 
analogy to workers and employment positions not otherwise covered under 
29 CFR 500.20(s)(1)).
    (35) Section 1411 Certification. 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.
    (36) Section 4980H(a) applicable payment amount. The term section 
4980H(a) applicable payment amount means, with respect to any month, 1/
12 of $2,000, adjusted for inflation in accordance with section 
4980H(c)(5) and any applicable guidance thereunder.
    (37) Section 4980H(b) applicable payment amount. The term section 
4980H(b) applicable payment amount means, with respect to any month, 1/
12 of $3,000, adjusted for inflation in accordance with section 
4980H(c)(5) and any applicable guidance thereunder.
    (38) Self-only coverage. The term self-only coverage means health 
insurance coverage provided to only one individual, generally the 
employee.
    (39) Stability period. The term stability period means a time 
period selected by an applicable large employer member that follows, 
and is associated with, a standard measurement period or an initial 
measurement period, and is used by the applicable large employer member 
as part of the process of determining whether an employee is a full-
time employee under the look-back measurement method in Sec.  54.4980H-
3(c).
    (40) Standard measurement period. The term standard measurement 
period means a time period of at least three but not more than 12 
consecutive months that an applicable large employer member selects and 
uses in determining whether an ongoing employee is a full-time employee 
under the look-back measurement method in Sec.  54.4980H-3(c). See 
Sec.  54.4980H-3(c)(1)(ii) for rules on payroll periods that include 
the beginning and end dates of the measurement period.
    (41) Start date. The term start date means the first date on which 
an employee is required to be credited with an hour of service with an 
employer. For rules relating to when, following a period for which an 
employee does not earn an hour of service, that employee may be treated 
as a new employee with a new start date rather than a continuing 
employee, see the averaging method for employment break periods at 
Sec.  54.4980H-3(e).
    (42) United States. The term United States means United States as 
defined in section 7701(a)(9).
    (43) Variable hour employee. The term 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.
    (44) Week. The term week means any period of seven consecutive 
calendar days applied consistently by the applicable large employer 
member.
    (b) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.


Sec.  54.4980H-2  Applicable large employer and applicable large 
employer member.

    (a) In general. Section 4980H applies to an applicable large 
employer and to all of the applicable large employer members that 
comprise that applicable large employer.
    (b) Determining applicable large employer status--(1) In general. 
An employer's status as an applicable large employer for a calendar 
year is determined by taking the sum of the total number of full-time 
employees (including any seasonal workers) for each calendar month in 
the preceding calendar year and the total number of FTEs (including any 
seasonal workers) for each calendar month in the preceding calendar 
year, and dividing by 12. The result, if not a whole number, is then 
rounded to the next lowest whole number. If the result of this 
calculation is less than 50, the employer is not an applicable large 
employer for the current calendar year. If the result of this 
calculation is 50 or more, the employer is an applicable large employer 
for the current calendar year, unless the seasonal worker exception in 
paragraph (b)(2) of this section applies.

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    (2) Seasonal worker exception. If the sum of an employer's full-
time employees and FTEs exceeds 50 for 120 days or less during the 
preceding calendar year, and the employees in excess of 50 who were 
employed during that period of no more than 120 days are seasonal 
workers, the employer is not considered to employ more than 50 full-
time employees (including FTEs) and the employer is not an applicable 
large employer for the current calendar year. For purposes of this 
paragraph (b)(2) only, four calendar months may be treated as the 
equivalent of 120 days. The four calendar months and the 120 days are 
not required to be consecutive.
    (3) Employers not in existence in preceding calendar year. An 
employer not in existence throughout the preceding calendar year is an 
applicable large employer for the current calendar year if it is 
reasonably expected to employ an average of at least 50 full-time 
employees (taking into account FTEs) on business days during the 
current calendar year and it actually employs an average of at least 50 
full-time employees (taking into account FTEs) on business days during 
the calendar year.
    (4) Special rules for government entities, churches, and 
conventions and associations of churches. [Reserved]
    (c) Full-time equivalent employees (FTEs)--(1) In general. In 
determining whether an employer is an applicable large employer, the 
number of FTEs it employed during the preceding calendar year are taken 
into account. All employees (including seasonal workers) who were not 
employed on average at least 30 hours of service per week for a 
calendar month in the preceding calendar year are included in 
calculating the employer's FTEs for that calendar month.
    (2) Calculating the number of FTEs. The number of FTEs for each 
calendar month in the preceding calendar year is determined by 
calculating the aggregate number of hours of service for that calendar 
month for employees who were not full-time employees (but not more than 
120 hours of service for any employee) and dividing that number by 120. 
In determining the number of FTEs for each calendar month, fractions 
are taken into account.
    (d) Examples. The following examples illustrate the rules of 
paragraphs (a) through (c) of this section. In these examples, hours of 
service are computed following the rules set forth in Sec.  54.4980H-3, 
and references to years refer to calendar years unless otherwise 
specified. The Employers in Examples 2 through 5 are each the sole 
applicable large employer member of the applicable large employer, as 
determined under section 414(b), (c), (m) and (o).
    Example 1. Applicable large employer/controlled group. (i) 
Facts. For 2015 and 2016, corporation P owns 100 percent of all 
classes of stock of corporation S and corporation T. P has no 
employees at any time in 2015. For every calendar month in 2015, S 
has 40 full-time employees and T has 60 full-time employees. P, S, 
and T are a controlled group of corporations under section 414(b).
    (ii) Conclusion. Because P, S and T have a combined total of 100 
full-time employees during 2015, P, S, and T is an applicable large 
employer for 2016. Each of P, S and T is an applicable large 
employer member for 2016.
    Example 2. Applicable large employer with FTEs. (i) Facts. 
During each calendar month of 2015, Employer L has 20 full-time 
employees each of whom averages 35 hours of service per week, 40 
employees each of whom averages 90 hours of service per month, and 
no seasonal workers.
    (ii) Conclusion. Each of the 20 employees who average 35 hours 
of service per week count as one full-time employee for each month. 
To determine the number of FTEs for each month, the total hours of 
service of the employees who are not full-time employees (but not 
more than 120 hours of service per employee) are aggregated and 
divided by 120. The result is that the employer has 30 FTEs for each 
month (40 x 90 = 3,600, and 3,600 / 120 = 30). Because Employer L 
has 50 full-time employees (the sum of 20 full-time employees and 30 
FTEs) during each month in 2015, and because the seasonal worker 
exception is not applicable, Employer L is an applicable large 
employer for 2016.
    Example 3. Seasonal worker exception. (i) Facts. During 2015, 
Employer N has 40 full-time employees for the entire calendar year, 
none of whom are seasonal workers. In addition, Employer N also has 
80 seasonal full-time workers who work for Employer N from September 
through December, 2015. Employer N has no FTEs during 2015.
    (ii) Conclusion. Before applying the seasonal worker exception, 
Employer N has 40 full-time employees during each of eight calendar 
months of 2015, and 120 full-time employees during each of four 
calendar months of 2015, resulting in an average of 66.5 employees 
for the year (rounded down to 66 full-time employees). However, 
Employer N's workforce equaled or exceeded 50 full-time employees 
(counting seasonal workers) for no more than four calendar months 
(treated as the equivalent of 120 days) in calendar year 2015, and 
the number of full-time employees would be less than 50 during those 
months if seasonal workers were disregarded. Accordingly, because 
after application of the seasonal worker exception in paragraph 
(b)(2) of this section Employer N is not considered to employ more 
than 50 full-time employees, Employer N is not an applicable large 
employer for 2016.
    Example 4. Seasonal workers and other FTEs.  (i) Facts. Same 
facts as in Example 3, except that Employer N has 20 FTEs in August, 
some of whom are seasonal workers.
    (ii) Conclusion. The seasonal worker exception in paragraph 
(b)(2) of this section does not apply if the number of an employer's 
full-time employees (including seasonal workers) and FTEs equals or 
exceeds 50 employees for more than 120 days during the calendar 
year. Because Employer N has at least 50 full-time employees for a 
period greater than four calendar months (treated as the equivalent 
of 120 days) during 2015, the exception in paragraph (b)(2) of this 
section does not apply. Employer N averaged 68 full-time employees 
in 2015: [(40 x 7) + (60 x 1) + (120 x 4)] / 12 = 68.33, rounded 
down to 68, and accordingly, Employer N is an applicable large 
employer for calendar year 2016.
    Example 5. New employer. (i) Facts. Corporation A is 
incorporated on January 1, 2015. On January 1, 2015, Corporation A 
has three employees. However, prior to incorporation, Corporation 
A's owners purchased a factory intended to open within two months of 
incorporation and to employ approximately 100 employees. By March 
15, 2015, Corporation A has more than 75 full-time employees.
    (ii) Conclusion. Because Corporation A can reasonably be 
expected to employ on average at least 50 full-time employees on 
business days during 2015, and actually employs an average of at 
least 50 full-time employees on business days during 2015, 
Corporation A is an applicable large employer (and an applicable 
large employer member).

    (e) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.


Sec.  54.4980H-3  Determining full-time employees.

    (a) In general. This section sets forth the rules for determining 
hours of service and status as a full-time employee for all purposes of 
section 4980H, provided that the look-back measurement methods for 
determining status as a full-time employee under paragraph (c) of this 
section apply solely for purposes of determining and calculating 
liability under section 4980H(a) and (b) (and not for purposes of 
determining status as an applicable large employer). See Sec.  
54.4980H-1(a)(18) for the definition of full-time employee.
    (b) Hours of service--(1) Hourly employees calculation. For 
employees paid on an hourly basis, an employer must calculate actual 
hours of service from records of hours worked and hours for which 
payment is made or due.
    (2) Non-hourly employees calculation--(i) In general. For employees 
paid on a non-hourly basis, an employer must calculate hours of service 
by using one of the following methods:
    (A) Using actual hours of service from records of hours worked and 
hours for which payment is made or due.
    (B) Using a days-worked equivalency whereby the employee is 
credited with eight hours of service for each day for

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which the employee would be required to be credited with at least one 
hour of service in accordance with paragraph (b)(1) of this section.
    (C) Using a weeks-worked equivalency whereby the employee is 
credited with 40 hours of service for each week for which the employee 
would be required to be credited with at least one hour of service in 
accordance with paragraph (b)(1) of this section.
    (ii) Change in method. An employer must use one of the three 
methods in paragraph (b)(2) of this section for calculating the hours 
of service for non-hourly employees. An employer is not required to use 
the same method for all non-hourly employees, and may apply different 
methods for different classifications of non-hourly employees, provided 
the classifications are reasonable and consistently applied. Similarly, 
an applicable large employer member is not required to apply the same 
methods as other applicable large employer members of the same 
applicable large employer for the same or different classifications of 
non-hourly employees, provided that in each case the classifications 
are reasonable and consistently applied by the applicable large 
employer member.
    (iii) Prohibited use of equivalencies. The number of hours of 
service calculated using the days-worked or weeks-worked equivalency 
must reflect generally the hours actually worked and the hours for 
which payment is made or due. An employer is not permitted to use the 
days-worked equivalency or the weeks-worked equivalency if the result 
is to substantially understate an employee's hours of service in a 
manner that would cause that employee not to be treated as full-time. 
For example, an employer may not use a days-worked equivalency in the 
case of an employee who generally works three 10-hour days per week, 
because the equivalency would substantially understate the employee's 
hours of service as 24 hours of service per week, which would result in 
the employee being treated as not a full-time employee. Rather, the 
number of hours of service calculated using the days-worked or weeks-
worked equivalency method must reflect generally the hours actually 
worked and the hours for which payment is made or due.
    (c) Look-back measurement method--(1) Ongoing employees--(i) In 
general. Under the look-back measurement method for ongoing employees, 
an applicable large employer determines each ongoing employee's full-
time status by looking back at the standard measurement period. The 
applicable large employer member determines the months in which the 
standard measurement period starts and ends, provided that the 
determination must be made on a uniform and consistent basis for all 
employees in the same category (see paragraph (c)(1)(v) of this section 
for a list of permissible categories). For example, if an applicable 
large employer member chooses a standard measurement period of 12 
months, the applicable large employer member could choose to make it 
the calendar year, a non-calendar plan year, or a different 12-month 
period, such as one that ends shortly before the start of the plan's 
annual open enrollment period. If the applicable large employer member 
determines that an employee was employed on average at least 30 hours 
per week during the standard measurement period, then the applicable 
large employer member treats the employee as a full-time employee 
during a subsequent stability period, regardless of the employee's 
number of hours of service during the stability period, so long as he 
or she remains an employee.
    (ii) Use of payroll periods. For payroll periods that are one week, 
two weeks, or semi-monthly in duration, an employer is permitted to 
treat as a measurement period a period that ends on the last day of the 
payroll period preceding the payroll period that includes the date that 
would otherwise be the last day of the measurement period, provided 
that the measurement period begins on the first day of the payroll 
period that includes the date that would otherwise be the first day of 
the measurement period. An employer may also treat as a measurement 
period a period that begins on the first day of the payroll period that 
follows the payroll period that includes the date that would otherwise 
be the first day of the measurement period, provided that the 
measurement period ends on the last day of the payroll period that 
includes the date that would otherwise be the last day of the 
measurement period. For example, an employer using the calendar year as 
a measurement period could exclude the entire payroll period that 
included January 1 (the beginning of the year) if it included the 
entire payroll period that included December 31 (the end of that same 
year), or, alternatively, could exclude the entire payroll period that 
included December 31 of a calendar year if it included the entire 
payroll period that included January 1 of that calendar year.
    (iii) Employee determined to be employed an average of at least 30 
hours of service per week. An employee who was employed on average at 
least 30 hours of service per week during the standard measurement 
period must be treated as a full-time employee for a stability period 
that begins immediately after the standard measurement period and any 
applicable administrative period. The stability period must be at least 
six consecutive calendar months but no shorter in duration than the 
standard measurement period.
    (iv) Employee determined not to be employed on average at least 30 
hours of service per week. If an employee was not employed an average 
at least 30 hours of service per week during the standard measurement 
period, the applicable large employer member may treat the employee as 
not a full-time employee during the stability period that follows, but 
is not longer than, the standard measurement period. The stability 
period must begin immediately after the end of the measurement period 
and any applicable administrative period.
    (v) Permissible employee categories. Subject to the rules governing 
the relationship between the length of the measurement period and the 
stability period, applicable large employer members may use measurement 
periods and stability periods that differ either in length or in their 
starting and ending dates for the following categories of employees:
    (A) Collectively bargained employees and non-collectively bargained 
employees.
    (B) Each group of collectively bargained employees covered by a 
separate collective bargaining agreement.
    (C) Salaried employees and hourly employees.
    (D) Employees whose primary places of employment are in different 
States.
    (vi) Optional administrative period. An applicable large employer 
member may provide for an administrative period that begins immediately 
after the end of a standard measurement period and that ends 
immediately before the associated stability period; however, any 
administrative period between the standard measurement period and the 
stability period for ongoing employees may neither reduce nor lengthen 
the measurement period or the stability period. The administrative 
period following the standard measurement period may last up to 90 
days. To prevent this administrative period from creating a gap in 
coverage, the administrative period must overlap with the prior 
stability period, so that, during any such administrative period 
applicable to ongoing employees following a standard measurement 
period, ongoing employees who are

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enrolled in coverage because of their status as full-time employees 
based on a prior measurement period must continue to be covered through 
the administrative period. Applicable large employer members may use 
administrative periods that differ in length for the categories of 
employees identified in paragraph (c)(1)(v) of this section.
    (vii) Change in position of employment or other employment status. 
If an ongoing employee's position of employment or other employment 
status changes before the end of a stability period, the change will 
not affect the application of the classification of the employee as a 
full-time employee (or not a full-time employee) for the remaining 
portion of the stability period. For example, if an ongoing employee in 
a certain position of employment is not treated as a full-time employee 
during a stability period because the employee's hours of service 
during the prior measurement period were insufficient for full-time-
employee treatment, and the employee changes position of employment to 
a position that involves an increased level of hours of service, the 
treatment of the employee as a non-full time employee during the 
remainder of the stability period is unaffected. Similarly, if an 
ongoing employee in a certain position of employment is treated as a 
full-time employee during a stability period because the employee's 
hours of service during the prior measurement period were sufficient 
for full-time-employee treatment, and the employee changes position of 
employment to a position that involves a lower level of hours of 
service, the treatment of the employee as a full-time employee during 
the remainder of the stability period is unaffected.
    (viii) Example. The following example illustrates the application 
of paragraph (c)(1) of this section:
    (i) Facts. Employer W is an applicable large employer member and 
computes hours of service following the rules in this section. Employer 
W chooses to use a 12-month stability period that begins January 1 and 
a 12-month standard measurement period that begins October 15. 
Consistent with the terms of Employer W's group health plan, only 
employees classified as full-time employees using the look-back 
measurement method are eligible for coverage. Employer W chooses to use 
an administrative period between the end of the standard measurement 
period (October 14) and the beginning of the stability period (January 
1) to determine which employees were employed on average 30 hours of 
service per week during the measurement period, notify them of their 
eligibility for the plan for the calendar year beginning on January 1 
and of the coverage available under the plan, answer questions and 
collect materials from employees, and enroll those employees who elect 
coverage in the plan. Previously-determined full-time employees already 
enrolled in coverage continue to be offered coverage through the 
administrative period.
    Employee A and Employee B have been employed by Employer W for 
several years, continuously from their start date. Employee A was 
employed on average 30 hours of service per week during the standard 
measurement period that begins October 15, 2015 and ends October 14, 
2016 and for all prior standard measurement periods. Employee B also 
was employed on average 30 hours of service per week for all prior 
standard measurement periods, but is not a full-time employee during 
the standard measurement period that begins October 15, 2015 and ends 
October 14, 2016.
    (ii) Conclusions. Because Employee A was employed for the entire 
standard measurement period that begins October 15, 2015 and ends 
October 14, 2016, Employee A is an ongoing employee with respect to the 
stability period running from January 1, 2017 through December 31, 
2017. Because Employee A was employed on average 30 hours of service 
per week during that standard measurement period, Employee A is offered 
coverage for the entire 2017 stability period (including the 
administrative period from October 15, 2017 through December 31, 2017). 
Because Employee A was employed on average 30 hours of service per week 
during the prior standard measurement period, Employee A is offered 
coverage for the entire 2016 stability period and, if enrolled, would 
continue such coverage during the administrative period from October 
15, 2016 through December 31, 2016.
    Because Employee B was employed for the entire standard measurement 
period that begins October 15, 2015 and ends October 14, 2016, Employee 
B is also an ongoing employee with respect to the stability period in 
2017. Because Employee B did not work full-time during this standard 
measurement period, Employee B is not required to be offered coverage 
for the stability period in 2017 (including the administrative period 
from October 15, 2017 through December 31, 2017). However, because 
Employee B was employed on average 30 hours of service per week during 
the prior standard measurement period, Employee B is offered coverage 
through the end of the 2016 stability period and, if enrolled, would 
continue such coverage during the administrative period from October 
15, 2016 through December 31, 2016. Employer W complies with the 
standards of paragraph (c)(1) of this section because the measurement 
and stability periods are no longer than 12 months, the stability 
period for ongoing employees who work full-time during the standard 
measurement period is not shorter than the standard measurement period, 
the stability period for ongoing employees who do not work full-time 
during the standard measurement period is no longer than the standard 
measurement period, and the administrative period is no longer than 90 
days.
    (2) New non-variable hour and non-seasonal employees. If an 
employee is reasonably expected at his or her start date to be a full-
time employee (and is not a seasonal employee), an employer that 
sponsors a group health plan that offers coverage to the employee at or 
before the conclusion of the employee's initial three full calendar 
months of employment will not be subject to an assessable payment under 
section 4980H by reason of its failure to offer coverage to the 
employee for up to the initial full three calendar months of 
employment; however, if the employer did not offer coverage to the 
employee by the end of the employee's initial three full calendar 
months of employment, the employer may be subject to a section 4980H 
assessable payment for those months as well as for any subsequent 
months for which coverage was not offered.
    (3) New variable hour and new seasonal employees--(i) In general. 
For new variable hour employees and new seasonal employees, applicable 
large employer members are permitted to determine whether the new 
employee is a full-time employee using an initial measurement period of 
between three and 12 months (as selected by the applicable large 
employer member) that begins on any date between the employee's start 
date and the first day of the first calendar month following the 
employee's start date. The applicable large employer member measures 
the new employee's hours of service during the initial measurement 
period and determines whether the employee was employed on average at 
least 30 hours of service per week during this period. The stability 
period for such employees must be the same length as the stability 
period for ongoing employees.
    (ii) Employees determined to be employed on average at least 30 
hours of service per week. If a new variable hour employee or new 
seasonal employee has on average at least 30

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hours of service per week during the initial measurement period, the 
applicable large employer member must treat the employee as a full-time 
employee during the stability period that begins after the initial 
measurement period (and any associated administrative period). The 
stability period must be a period of at least six consecutive calendar 
months that is no shorter in duration than the initial measurement 
period.
    (iii) Employees determined not to be employed on average at least 
30 hours of service per week. If a new variable hour employee or new 
seasonal employee does not have on average at least 30 hours of service 
per week during the initial measurement period, the applicable large 
employer member is permitted to treat the employee as not a full-time 
employee during the stability period that follows the initial 
measurement period. This stability period for such employees must not 
be more than one month longer than the initial measurement period and, 
in accordance with paragraph (c)(4) of this section, must not exceed 
the remainder of the standard measurement period (plus any associated 
administrative period) in which the initial measurement period ends.
    (4) Transition from new employee to ongoing employee--(i) In 
general. Once a new variable hour employee or new seasonal employee has 
been employed for an entire standard measurement period, the applicable 
large employer must test the employee for full-time employee status, 
beginning with that standard measurement period, at the same time and 
under the same conditions as apply to other ongoing employees. 
Accordingly, for example, an applicable large employer member with a 
calendar year standard measurement period that also uses a one-year 
initial measurement period beginning on the employee's start date would 
test a new variable hour employee whose start date is February 12 for 
full-time status first based on the initial measurement period 
(February 12 through February 11 of the following year) and again based 
on the calendar year standard measurement period (if the employee 
continues in employment for that entire standard measurement period) 
beginning on January 1 of the year after the start date.
    (ii) Employee determined to be employed an average of at least 30 
hours of service per week. An employee who was employed an average of 
at least 30 hours of service per week during an initial measurement 
period or standard measurement period must be treated as a full-time 
employee for the entire associated stability period. This is the case 
even if the employee was employed an average of at least 30 hours of 
service per week during the initial measurement period but was not 
employed an average of at least 30 hours of service per week during the 
overlapping or immediately following standard measurement period. In 
that case, the applicable large employer member may treat the employee 
as not a full-time employee only after the end of the stability period 
associated with the initial measurement period. Thereafter, the 
applicable large employer member must determine the employee's status 
as a full-time employee in the same manner as it determines such status 
in the case of its other ongoing employees as described in paragraph 
(c)(1) of this section.
    (iii) Employee determined not to be employed an average of at least 
30 hours of service per week. If the employee was not employed an 
average of at least 30 hours of service per week during the initial 
measurement period, but was employed at least 30 hours of service per 
week during the overlapping or immediately following standard 
measurement period, the employee must be treated as a full-time 
employee for the entire stability period that corresponds to that 
standard measurement period (even if that stability period begins 
before the end of the stability period associated with the initial 
measurement period). Thereafter, the applicable large employer member 
must determine the employee's status as a full-time employee in the 
same manner as it determines such status in the case of its other 
ongoing employees as described in paragraph (c)(1) of this section.
    (iv) Permissible differences in measurement or stability periods 
for different categories of employees. Subject to the rules governing 
the relationship between the length of the measurement period and the 
stability period, applicable large employer members may use measurement 
periods and stability periods that differ either in length or in their 
starting and ending dates for the categories of employees identified in 
paragraph (c)(1)(v) of this section).
    (v) Optional administrative period--(A) In general. Subject to the 
limits in paragraph (c)(4)(v)(B) of this section, an applicable large 
employer member is permitted to apply an administrative period in 
connection with an initial measurement period and before the start of 
the stability period. This administrative period must not exceed 90 
days in total. For this purpose, the administrative period includes all 
periods between the start date of a new variable hour employee or new 
seasonal employee and the date the employee is first offered coverage 
under the applicable large employer member's group health plan, other 
than the initial measurement period. Thus, for example, if the 
applicable large employer member begins the initial measurement period 
on the first day of the first month following a new variable hour or 
new seasonal employee's start date, the period between the employee's 
start date and the first day of the next month must be taken into 
account in applying the 90-day limit on the administrative period. 
Similarly, if there is a period between the end of the initial 
measurement period and the date the employee is first offered coverage 
under the plan, that period must be taken into account in applying the 
90-day limit on the administrative period. Applicable large employer 
members may use administrative periods that differ in length for the 
categories of employees identified in paragraph (c)(1)(v) of this 
section.
    (B) Limit on combined length of initial measurement period and 
administrative period. In addition to the specific limits on the 
initial measurement period (which must not exceed 12 months) and the 
administrative period (which must not exceed 90 days), there is a limit 
on the combined length of the initial measurement period and the 
administrative period applicable to a new variable hour employee or new 
seasonal employee. Specifically, the initial measurement period and 
administrative period together cannot extend beyond the last day of the 
first calendar month beginning on or after the first anniversary of the 
employee's start date. For example, if an applicable large employer 
member uses a 12-month initial measurement period for a new variable 
hour employee, and begins that initial measurement period on the first 
day of the first calendar month following the employee's start date, 
the period between the end of the initial measurement period and the 
offer of coverage to a new variable hour employee who works full time 
during the initial measurement period must not exceed one month.
    (5) Examples. The following examples illustrate the look-back 
measurement methods described in paragraphs (c)(2) through (c)(4) of 
this section. In all of the following examples, the applicable large 
employer member offers all of its full-time employees (and their 
dependents) the opportunity to enroll in minimum essential coverage 
under an eligible employer-sponsored plan. The coverage is affordable 
within the

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meaning of section 36B(c)(2)(C)(i) (or is treated as affordable 
coverage under one of the affordability safe harbors described in Sec.  
54.4980H-5) and provides minimum value within the meaning of section 
36B(c)(2)(C)(ii). In Example 1 through Example 8, the new employee is a 
new variable hour employee, and the employer has chosen to use a 12-
month standard measurement period for ongoing employees starting 
October 15 and a 12-month stability period associated with that 
standard measurement period starting January 1. (Thus, during the 
administrative period from October 15 through December 31 of each 
calendar year, the employer continues to offer coverage to employees 
who qualified for coverage for that entire calendar year based upon 
working on average at least 30 hours per week during the prior standard 
measurement period.) Also, the employer offers health plan coverage 
only to full-time employees (and their dependents). In Example 9 and 
Example 10, the new employee is a new variable hour employee, and the 
employer uses a six-month standard measurement period, starting each 
May 15 and November 15, with six-month stability periods associated 
with those standard measurement periods starting January 1 and July 1.

    Example 1 (12-Month Initial Measurement Period Followed by 1+ 
Partial Month Administrative Period). (i) Facts. For new variable 
hour employees, Employer B uses a 12-month initial measurement 
period that begins on the start date and applies an administrative 
period from the end of the initial measurement period through the 
end of the first calendar month beginning on or after the end of the 
initial measurement period. Employer B hires Employee Y on May 10, 
2015. Employee Y's initial measurement period runs from May 10, 
2015, through May 9, 2016. Employee Y has an average of 30 hours of 
service per week during this initial measurement period. Employer B 
offers coverage to Employee Y for a stability period that runs from 
July 1, 2016 through June 30, 2017.
    (ii) Conclusion. Employee Y has an average of 30 hours of 
service per week during his initial measurement period and Employer 
B uses an initial measurement period that does not exceed 12 months; 
an administrative period totaling not more than 90 days; and a 
combined initial measurement period and administrative period that 
does not last beyond the final day of the first calendar month 
beginning on or after the one-year anniversary of Employee Y's start 
date. Accordingly, from Employee Y's start date through June 30, 
2017, Employer B is not subject to any payment under section 4980H 
with respect to Employee Y, because Employer B complies with the 
standards for the initial measurement period and stability periods 
for a new variable hour employee. Employer B must test Employee Y 
again based on the period from October 15, 2015 through October 14, 
2016 (Employer B's first standard measurement period that begins 
after Employee Y's start date).
    Example 2 (11-Month Initial Measurement Period Followed by 2+ 
Partial Month Administrative Period). (i) Facts. Same as Example 1, 
except that Employer B uses an 11-month initial measurement period 
that begins on the start date and applies an administrative period 
from the end of the initial measurement period until the end of the 
second calendar month beginning after the end of the initial 
measurement period. Employer B hires Employee Y on May 10, 2015. 
Employee Y's initial measurement period runs from May 10, 2015, 
through April 9, 2016. Employee Y has an average of 30 hours of 
service per week during this initial measurement period. Employer B 
offers coverage to Employee Y for a stability period that runs from 
July 1, 2016 through June 30, 2017.
    (ii) Conclusion. Same as Example 1.
    Example 3 (11-Month Initial Measurement Period Preceded by 
Partial Month Administrative Period and Followed by 2-Month 
Administrative Period). (i) Facts. Same as Example 1, except that 
Employer B uses an 11-month initial measurement period that begins 
on the first day of the first calendar month beginning after the 
start date and applies an administrative period that runs from the 
end of the initial measurement period through the end of the second 
calendar month beginning on or after the end of the initial 
measurement period. Employer B hires Employee Y on May 10, 2015. 
Employee Y's initial measurement period runs from June 1, 2015, 
through April 30, 2016. Employee Y has an average of 30 hours of 
service per week during this initial measurement period. Employer B 
offers coverage to Employee Y for a stability period that runs from 
July 1, 2016 through June 30, 2017.
    (ii) Conclusion. Same as Example 1.
    Example 4 (12-Month Initial Measurement Period Preceded by 
Partial Month Administrative Period and Followed by 2-Month 
Administrative Period). (i) Facts. For new variable hour employees, 
Employer B uses a 12-month initial measurement period that begins on 
the first day of the first month following the start date and 
applies an administrative period that runs from the end of the 
initial measurement period through the end of the second calendar 
month beginning on or after the end of the initial measurement 
period. Employer B hires Employee Y on May 10, 2015. Employee Y's 
initial measurement period runs from June 1, 2015, through May 31, 
2016. Employee Y has an average of 30 hours of service per week 
during this initial measurement period. Employer B offers coverage 
to Employee Y for a stability period that runs from August 1, 2016 
through July 31, 2017.
    (ii) Conclusion. Employer B does not satisfy the standards for 
the look-back measurement method in paragraph (c)(4)(v) of this 
section because the combination of the initial partial month delay, 
the 12-month initial measurement period, and the two month 
administrative period means that the coverage offered to Employee Y 
does not become effective until after the first day of the second 
calendar month following the first anniversary of Employee Y's start 
date. Accordingly, Employer B is potentially subject to a payment 
under section 4980H.
    Example 5 (Continuous Full-Time Employee). (i) Facts. Same as 
Example 1; in addition, Employer B tests Employee Y again based on 
Employee Y's hours of service from October 15, 2015 through October 
14, 2016 (Employer B's first standard measurement period that begins 
after Employee Y's start date), determines that Employee Y has an 
average of 30 hours of service a week during that period, and offers 
Employee Y coverage for July 1, 2017 through December 31, 2017. 
(Employee Y already has an offer of coverage for the period of 
January 1, 2017 through June 30, 2017 because that period is covered 
by the initial stability period following the initial measurement 
period, during which Employee Y was determined to be a full-time 
employee.)
    (ii) Conclusion. Employer B is not subject to any payment under 
section 4980H for 2017 with respect to Employee Y.
    Example 6 (Initially Full-Time Employee, Becomes Non-Full-Time 
Employee). (i) Facts. Same as Example 1; in addition, Employer B 
tests Employee Y again based on Employee Y's hours of service from 
October 15, 2015 through October 14, 2016 (Employer B's first 
standard measurement period that begins after Employee Y's start 
date), and determines that Employee Y has an average of 28 hours of 
service a week during that period. Employer B continues to offer 
coverage to Employee Y through June 30, 2017 (the end of the 
stability period based on the initial measurement period during 
which Employee Y was determined to be a full-time employee), but 
does not offer coverage to Employee Y for the period of July 1, 2017 
through December 31, 2017.
    (ii) Conclusion. Employer B is not subject to any payment under 
section 4980H for 2016 with respect to Employee Y, provided that it 
offers coverage to Employee Y from July 1, 2016 through June 30, 
2017 (the entire stability period associated with the initial 
measurement period).
    Example 7 (Initially Non-Full-Time Employee). (i) Facts. Same as 
Example 1, except that Employee Y has an average of 28 hours of 
service per week during the period from May 10, 2015 through May 9, 
2016 and Employer B does not offer coverage to Employee Y in 2016.
    (ii) Conclusion. From Employee Y's start date through the end of 
2016, Employer B is not subject to any payment under section 4980H, 
because Employer B complies with the standards for the measurement 
and stability periods for a new variable hour employee with respect 
to Employee Y.
    Example 8 (Initially Non-Full-Time Employee, Becomes Full-Time 
Employee). (i) Facts. Same as Example 7; in addition, Employer B 
tests Employee Y again based on Employee Y's hours of service from 
October 15, 2015 through October 14, 2016 (Employer B's first 
standard measurement period that begins after Employee Y's start 
date), determines that Employee Y has an average of 30 hours of 
service per week during this standard measurement period, and offers 
coverage to Employee Y for 2017.

[[Page 248]]

    (ii) Conclusion. Employer B is not subject to any payment under 
section 4980H for 2017 with respect to Employee Y.
    Example 9 (Initially Full-Time Employee). (i) Facts. For new 
variable hour employees, Employer C uses a six-month initial 
measurement period that begins on the start date and applies an 
administrative period that runs from the end of the initial 
measurement period through the end of the first full calendar month 
beginning after the end of the initial measurement period. Employer 
C hires Employee Z on May 10, 2015. Employee Z's initial measurement 
period runs from May 10, 2015, through November 9, 2015, during 
which Employee Z has an average of 30 hours of service per week. 
Employer C offers coverage to Employee Z for a stability period that 
runs from January 1, 2016 through June 30, 2016.
    (ii) Conclusion. Employer C uses an initial measurement period 
that does not exceed 12 months; an administrative period totaling 
not more than 90 days; and a combined initial measurement period and 
administrative period that does not last longer than the final day 
of the first calendar month beginning on or after the one-year 
anniversary of Employee Z's start date. From Employee Z's start date 
through June 30, 2016, Employer C is not subject to any payment 
under section 4980H, because Employer C complies with the standards 
for the measurement and stability periods for a new variable hour 
employee with respect to Employee Z. Employer C must test Employee Z 
again based on Employee Z's hours of service during the period from 
November 15, 2015 through May 14, 2016 (Employer C's first standard 
measurement period that begins after Employee Z's start date).
    Example 10 (Initially Full-Time Employee, Becomes Non-Full-Time 
Employee). (i) Facts. Same as Example 9; in addition, Employer C 
tests Employee Z again based on Employee Z's hours of service during 
the period from November 15, 2015 through May 14, 2016 (Employer C's 
first standard measurement period that begins after Employee Z's 
start date), during which period Employee Z has an average of 28 
hours of service per week. Employer C continues to offer coverage to 
Employee Z through June 30, 2016 (the end of the initial stability 
period based on the initial measurement period during which Employee 
Z has an average of 30 hours of service per week), but does not 
offer coverage to Employee Z from July 1, 2016 through December 31, 
2016.
    (ii) Conclusion. Employer C is not subject to any payment under 
section 4980H with respect to Employee Z for 2016.
    Example 11 (Seasonal Employee, 12-Month Initial Measurement 
Period; 1+ Partial Month Administrative Period). (i) Facts. Employer 
D offers health plan coverage only to full-time employees (and their 
dependents). Employer D uses a 12-month initial measurement period 
for new variable hour employees and seasonal employees that begins 
on the start date and applies an administrative period from the end 
of the initial measurement period through the end of the first 
calendar month beginning after the end of the initial measurement 
period. Employer D hires Employee S, a ski instructor, on November 
15, 2015 with an anticipated season during which Employee S will 
work running through March 15, 2016. Employer D determines that 
Employee S is a seasonal employee based upon a reasonable good faith 
interpretation of that term. Employee S's initial measurement period 
runs from November 15, 2015, through November 14, 2016. Employee S 
is expected to have 50 hours of service per week from November 15, 
2015 through March 15, 2016, but is not reasonably expected to 
average 30 hours of service per week for the 12-month initial 
measurement period.
    (ii) Conclusion. Employer D cannot determine whether Employee S 
is reasonably expected to average at least 30 hours of service per 
week for the 12-month initial measurement period. Accordingly, 
Employer D may treat Employee S as a variable hour employee during 
the initial measurement period.
    Example 12 (Variable Hour Employee). (i) Facts. Employer E is in 
the trade or business of providing temporary workers to numerous 
clients that are unrelated to Employer E and to one another. 
Employer E is the common law employer of the temporary workers based 
on all of the facts and circumstances. Employer E offers health plan 
coverage only to full-time employees (including temporary workers 
who are full-time employees) and their dependents. Employer E uses a 
12-month initial measurement period for new variable hour employees 
and new seasonal employees that begins on the start date and applies 
an administrative period from the end of the initial measurement 
period through the end of the first calendar month beginning after 
the end of the initial measurement period. Employer E hires Employee 
T on January 1, 2015 and anticipates that it will assign Employee T 
to provide services for various clients. As of the beginning of the 
initial measurement period, Employer E reasonably expects that, over 
the initial measurement period, Employee T is likely to be offered 
short-term assignments with several different clients, with 
significant gaps between the assignments and that the assignments 
will differ in the average hours of service per week (meaning 
averaging both above and below 30 hours of service per week), all 
depending on client needs and Employee T's availability. The number 
of actual assignments that Employee T will be offered, the number 
that Employee T will accept, the duration of assignments, the length 
of the gaps between assignments, and whether various assignments 
will result in Employee T being employed on average at least 30 
hours of service per week during the assignment, are all uncertain.
    (ii) Conclusion. Employer E cannot determine whether Employee T 
is reasonably expected to average at least 30 hours of service per 
week for the 12-month initial measurement period. Accordingly, 
Employer E may treat Employee T as a variable hour employee during 
the initial measurement period.
    Example 13 (Variable Hour Employee). (i) Facts. Employee A is 
hired on an hourly basis by Employer Y to fill in for employees who 
are absent and to provide additional staffing at peak times. 
Employer Y expects that Employee A will average 30 hours of service 
per week or more for A's first few months of employment, while 
assigned to a specific project, but also reasonably expects that the 
assignments will be of unpredictable duration, that there will be 
gaps of unpredictable duration between assignments, that the hours 
per week required by subsequent assignments will vary, and that A 
will not necessarily be available for all assignments.
    (ii) Conclusion. Employer Y cannot determine whether Employee A 
is reasonably expected to average at least 30 hours of service per 
week for the initial measurement period. Accordingly, Employer Y may 
treat Employee A as a variable hour employee.

    (d) Change in employment status--(1) In general. If the position of 
employment or other employment status of a new variable hour employee 
or new seasonal employee materially changes before the end of the 
initial measurement period in such a way that, if the employee had 
begun employment in the new position or status, the employee would have 
reasonably been expected to be employed on average at least 30 hours of 
service per week, the employer is not required to treat the employee as 
a full-time employee for purposes of determining and calculating any 
liability under section 4980H until the first day of the fourth month 
following the change in employment status or, if earlier and the 
employee averages more than 30 hours of service per week during the 
initial measurement period, the first day of the first month following 
the end of the initial measurement period (including any optional 
administrative period associated with the initial measurement period).
    (2) Example. The following example illustrates the provisions of 
paragraph (d)(1) of this section. In the following example, the 
applicable large employer member offers all of its full-time employees 
(and their dependents) the opportunity to enroll in minimum essential 
coverage under an eligible employer-sponsored plan. The coverage is 
affordable within the meaning of section 36B(c)(2)(C)(i) (or is treated 
as affordable coverage under one of the affordability safe harbors 
described in Sec.  54.4980H-5) and provides minimum value within the 
meaning of section 36B(c)(2)(C)(ii).

    Example (Change in employment from variable hour employee to 
non-variable hour employee). (i) Facts. For new variable hour 
employees, Employer A uses a 12-month initial measurement period 
that begins on the start date and applies an administrative period 
from the end of the initial measurement period through the end of 
the first calendar month beginning on or after the end of the 
initial measurement period. Employer A hires Employee Z on May 10,

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2015. Employer A's initial measurement period runs from May 10, 
2015, through May 9, 2016, with the optional administrative period 
ending June 30, 2016. At Employee Z's May 10, 2015 start date, 
Employee Z is a variable hour employee. On September 15, 2015, 
Employer A promotes Employee Z to a position that can reasonably be 
expected to average at least 30 hours of service per week.
    (ii) Conclusion. For purposes of determining Employer A's 
potential liability under section 4980H, Employee Z must be treated 
as a full-time employee as of January 1, 2016, because that date is 
the earlier of the first day of the fourth calendar month following 
the change in position (January 1, 2016) or the first day of the 
calendar month after the end of the initial measurement period plus 
the optional administrative period (July 1, 2016).

    (e) Employees rehired after termination of employment or resuming 
service after other absence--(1) Treatment as a new employee after a 
period of absence. Solely for purposes of section 4980H, an employee 
who resumes providing services to (or is otherwise credited with an 
hour of service for) an applicable large employer after a period during 
which the employee was not credited with any hours of service may be 
treated as having terminated employment and having been rehired, and 
therefore may be treated as a new employee upon the resumption of 
services only if the employee did not have an hour of service for the 
applicable large employer for a period of at least 26 consecutive weeks 
immediately preceding the resumption of services or, if chosen by the 
applicable large employer, for a shorter period (measured in weeks) of 
at least four consecutive weeks that exceeds the number of weeks of 
that employee's period of employment with the applicable large employer 
immediately preceding the period during which the employee was not 
credited with any hours of service. For purposes of the preceding 
sentence, the duration of the period of employment immediately 
preceding the period during which the employee was not credited with 
any hours of service is determined after application to that period of 
employment of the averaging methods described in paragraph (e)(4) of 
this section, if applicable. An employee treated as a continuing 
employee retains, upon resumption of services, the status that employee 
had with respect to the application of any stability period (for 
example, if the continuing employee returns during a stability period 
in which the employee is treated as a full-time employee, the employee 
is treated as a full-time employee upon return and through the end of 
that stability period). For purpose of the preceding sentence, a 
continuing employee treated as a full-time employee will be treated as 
offered coverage upon resumption of services if the employee is offered 
coverage as of the first day that employee is credited with an hour of 
service, or, if later, as soon as administratively practicable. This 
rule set forth in this paragraph (e)(1) applies solely for the purpose 
of determining whether the employee, upon the resumption of services, 
is treated as a new employee or as a continuing employee, and does not 
determine whether the employee is treated as a continuing full-time 
employee or a terminated employee during the period during which no 
hours of service are credited.
    (2) Employment break period defined. An employment break period is 
a period of at least four consecutive weeks (disregarding special 
unpaid leave as defined in paragraph (e)(3) of this section) during 
which an employee of an educational organization is not credited with 
hours of service for an applicable large employer.
    (3) Definitions--(i) Special unpaid leave defined. For purposes of 
this paragraph (e), special unpaid leave refers to--
    (A) Unpaid leave that is subject to the Family and Medical Leave 
Act of 1993 (FMLA), Public Law 103-3, 20 U.S.C. 2601 et seq.,
    (B) Unpaid leave that is subject to the Uniformed Services 
Employment and Reemployment Rights Act of 1994 (USERRA), Public Law 
103-353, 38 U.S.C. 4301 et seq., or
    (C) Unpaid leave on account of jury duty.
    (ii) Educational organization. For purposes of this paragraph (e), 
educational organization means an entity described in Sec.  1.170A-
9(c)(1) of this chapter, whether or not described in section 501(c)(3) 
and exempt under section 501(a). Thus, the term educational 
organization includes taxable entities, tax-exempt entities and 
government entities.
    (4) Averaging method for special unpaid leave and employment break 
periods. For purposes of applying the look-back measurement method 
described in paragraph (c) of this section to an employee who is not 
treated as a new employee under paragraph (e)(1) of this section, the 
employer determines the employee's average hours of service for a 
measurement period by computing the average after excluding any special 
unpaid leave (and, in the case of an employer that is an educational 
organization, also excluding any employment break period) during that 
measurement period and by using that average as the average for the 
entire measurement period. Alternatively, for purposes of determining 
the employee's average hours of service for the measurement period, the 
employer may choose to treat the employee as credited with hours of 
service for any periods of special unpaid leave (and, in the case of an 
employer that is an educational organization, any employment break 
period) during that measurement period at a rate equal to the average 
weekly rate at which the employee was credited with hours of service 
during the weeks in the measurement period that are not part of a 
period of special unpaid leave (or, in the case of an employer that is 
an educational organization, an employment break period). 
Notwithstanding the preceding two sentences, no more than 501 hours of 
service during employment break periods in a calendar year are required 
to be excluded (under the first sentence) or credited (under the second 
sentence) by an educational organization, provided that this 501-hour 
limit does not apply to hours of service required to be excluded or 
credited (as the case may be) in respect of special unpaid leave. In 
applying the preceding sentence, an employer that uses the method 
described in the first sentence of this paragraph (e)(4) determines the 
number of hours excluded by multiplying the average weekly rate for the 
measurement period (determined as in the second sentence of this 
paragraph (e)(4)) by the number of weeks in the employment break period 
and periods of special unpaid leave. For purposes of this paragraph 
(e)(4), in computing the average weekly rate, employers are permitted 
to use any reasonable method if applied on a consistent basis. In 
addition, if an employee's average weekly rate under this paragraph 
(e)(4) is being computed for a measurement period and that measurement 
period is shorter than six months, the six-month period ending with the 
close of the measurement period is used to compute the average hours of 
service.
    (5) Averaging rules for employment break periods for employers 
other than educational organizations. [RESERVED]
    (6) Anti-abuse rule. For purposes of this paragraph (e), any hour 
of service will be disregarded if the hour of service is credited, or 
the services giving rise to the crediting of the hour of service are 
requested or required of the employee, for a purpose of avoiding or 
undermining the application of the employee rehire rules under 
paragraph (e)(1) of this section, or the application of the averaging 
method for employment break periods under paragraph (e)(4) of

[[Page 250]]

this section. For example, if an employee of an educational 
organization would otherwise have a period with no hours of service to 
which the rules under paragraph (e)(4) of this section would apply, but 
for the employer's request or requirement that the employee perform one 
or more than one hour of service for a purpose of avoiding the 
application of those rules, any such hours of service for the week are 
disregarded, and the rules under paragraphs (e)(4) of this section will 
apply.
    (7) Examples. The following examples illustrate the provisions of 
paragraph (e) of this section. All employers in these examples are 
applicable large employer members, each is in a different applicable 
large employer group, and each computes hours of service under the 
rules in paragraphs (a) through (e) of this section. None of the 
periods during which an employee is not credited with an hour of 
service for an employer involve special unpaid leave (as defined in 
paragraph (e)(3) of this section) or the employee being credited with 
hours of service for any applicable large employer member in the same 
applicable large employer as the employer.

    Example 1. (i) Facts. As of April 1, 2015, Employee A has been 
an employee of Employer Z (which is not an educational organization 
as defined in paragraph (e)(3) of this section) for 10 years. On 
April 1, 2015, Employee A terminates employment and is not credited 
with an hour of service until September 1, 2015 when Employer Z 
rehires Employee A and Employee A continues as an employee through 
December 31, 2015, which is the close of the measurement period as 
applied by employer Z.
    (ii) Conclusion. Because Employee A's period for which he is not 
credited with any hour of service is not longer than Employee A's 
prior period of employment and is less than 26 weeks, Employee A is 
not treated as having terminated employment and been rehired for 
purposes of determining whether Employee A is treated as a new 
employee upon resumption of services. Therefore, Employee A's hours 
of service prior to termination are required to be taken into 
account for purposes of the measurement period, and, Employee A's 
period with no hours of service is taken into account as a period of 
zero hours of service during the measurement period.
    Example 2. (i) Facts. Same facts as Example 1, except that 
Employee A is rehired on December 1, 2015.
    (ii) Conclusion. Because the period during which Employee A is 
not credited with an hour of service for Employer Z, exceeds 26 
weeks, Employee A may be treated as having terminated employment on 
April 1, 2015 and having been rehired as a new employee on December 
1, 2015, for purposes of determining Employee A's full-time employee 
status. Because Employee A is treated as a new employee, Employee 
A's hours of service prior to termination are not required to be 
taken into account for purposes of the measurement period, and the 
period between termination and rehire with no hours of service is 
not taken into account in the new measurement period that begins 
after the employee is rehired.
    Example 3. (i) Facts. Employee B is employed by Employer X, an 
educational organization as defined in paragraph (e)(3) of this 
section. Employee B is employed for 38 hours of service per week on 
average from September 7, 2013 through May 22, 2014, and then does 
not provide services (and is not otherwise credited with an hour of 
service) during the summer break when the school is generally not in 
session except for limited summer classes and activities. Employee B 
resumes providing services for Employer X on September 5, 2014, when 
the new school year begins.
    (ii) Conclusion. Because the period from May 23 through 
September 4, 2014 (a total of 15 weeks) during which Employee B is 
not credited with an hour of service does not exceed 26 weeks, and 
also does not exceed the number of weeks of Employee B's immediately 
preceding period of employment, Employee B is not treated as having 
terminated employment on May 23, 2014 and having been rehired on 
September 5, 2014. Also, for purposes of determining Employee B's 
average hours per week for the measurement period, Employee B is 
credited, under the averaging method for employment break periods 
applicable to educational organizations, as having an average of 38 
hours per week for the 15 weeks between May 23 and September 4, 
2014, during which Employee B otherwise was credited with no hours 
of service.

    (f) Nonpayment or late payment of premiums. An applicable large 
employer member will not be treated as failing to offer to a full-time 
employee (and his or her dependents) the opportunity to enroll in 
minimum essential coverage under an eligible employer-sponsored plan 
for an employee whose coverage under the plan is terminated during the 
coverage period solely due to the employee failing to make a timely 
payment of the employee portion of the premium. This treatment 
continues only through the end of the coverage period (typically the 
plan year). For this purpose, the rules in Sec.  54.4980B-8, Q&A-5(a), 
(c), (d) and (e) apply under this section to the payment for coverage 
with respect to a full-time employee in the same manner that they apply 
to payment for COBRA continuation coverage under Sec.  54.4980B-8.
    (g) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.


Sec.  54.4980H-4  Assessable payments under section 4980H(a).

    (a) In general. If an applicable large employer member fails to 
offer to its full-time employees (and their dependents) the opportunity 
to enroll in minimum essential coverage under an eligible employer-
sponsored plan for any calendar month, and the applicable large 
employer member has received a Section 1411 Certification with respect 
to at least one full-time employee, an assessable payment is imposed. 
For the calendar month, the applicable large employer member will owe 
an assessable payment equal to the product of the section 4980H(a) 
applicable payment amount and the number of full-time employees of the 
applicable large employer member (adjusted in accordance with paragraph 
(d) of this section). For purposes of this paragraph (a), an applicable 
large employer member is treated as offering such coverage to its full-
time employees (and their dependents) for a calendar month if, for that 
month, it offers such coverage to all but five percent (or, if greater, 
five) of its full-time employees (provided that an employee is treated 
as having been offered coverage only if the employer also offers 
coverage to that employee's dependents).
    (b) Offer of coverage. An applicable large employer member will not 
be treated as having made an offer of coverage to a full-time employee 
for a plan year if the employee does not have an effective opportunity 
to elect to enroll (or decline to enroll) in the coverage no less than 
once during the plan year. Whether an employee has an effective 
opportunity is determined based on all the relevant facts and 
circumstances, including adequacy of notice of the availability of the 
offer of coverage, the period of time during which acceptance of the 
offer of coverage may be made, and any other conditions on the offer.
    (c) Partial calendar month. If an applicable large employer member 
fails to offer coverage to a full-time employee for any day of a 
calendar month, that employee is treated as not offered coverage during 
that entire month. However, in a calendar month in which the employment 
of a full-time employee terminates, if the employee would have been 
offered coverage for the entire month had the employee been employed 
for the entire month, the employee is treated as having been offered 
coverage for that entire month.
    (d) Allocated reduction of 30 full-time employees. For purposes of 
the liability calculation under paragraph (a) of this section, an 
applicable large employer member's number of full-time employees is 
reduced by that member's allocable share of 30. The applicable large 
employer member's allocation is equal to 30 allocated ratably among all

[[Page 251]]

members of the applicable large employer on the basis of the number of 
full-time employees employed by each applicable large employer member 
during the calendar year. If an applicable large employer member's 
total allocation is a fractional number that is less than one, it will 
be rounded up to one. This rounding rule may result in the aggregate 
reduction for the entire group of applicable large employer members 
exceeding 30.
    (e) Example. The following example illustrates the provisions of 
paragraphs (a) and (b) of this section.

    Example. (i) Facts. Applicable large employer member A and 
applicable large employer member B are the two members of an 
applicable large employer. Applicable large employer member A 
employs 40 full-time employees in each calendar month of 2015. 
Applicable large employer member B employs 35 full-time employees in 
each calendar month of 2015. For 2015, the applicable payment amount 
for a calendar month is $2,000 divided by 12. Applicable large 
employer member A does not sponsor an eligible employer-sponsored 
plan for any calendar month of 2015, and receives a Section 1411 
Certification for 2015 with respect to at least one of its full-time 
employees. Applicable large employer member B sponsors an eligible 
employer-sponsored plan under which all of its full-time employees 
are eligible for minimum essential coverage.
    (ii) Conclusion. Pursuant to section 4980H(a) and this section, 
applicable large employer member A is subject to an assessable 
payment under section 4980H(a) for 2015 of $48,000, which is equal 
to 24 x $2,000 (40 full-time employees reduced by 16 (its allocable 
share of the 30-employee offset ((40/75) x 30 = 16)) and then 
multiplied by $2,000). Applicable large employer member B is not 
subject to an assessable payment under section 4980H(a) for 2015.

    (f) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.


Sec.  54.4980H-5  Assessable payments under section 4980H(b).

    (a) In general. If an applicable large employer member offers to 
its full-time employees (and their dependents) the opportunity to 
enroll in minimum essential coverage under an eligible employer-
sponsored plan for any calendar month (including an offer of coverage 
to all but five percent or less (or, if greater, five or less) of its 
full-time employees (and their dependents)) and the applicable large 
employer member has received a Section 1411 Certification with respect 
to one or more full-time employees of the applicable large employer, 
then there is imposed on the applicable large employer member an 
assessable payment equal to the product of the number of full-time 
employees of the applicable large employer member for which it has 
received a Section 1411 Certification (minus the number of those 
employees who are new full-time employees during their first three 
months of employment, who are new variable hour or new seasonal 
employees during the months of that employee's initial measurement 
period (and associated administrative period) under Sec.  54.4980H-
3(c)(3), or who were offered the opportunity to enroll in minimum 
essential coverage under an eligible employer-sponsored plan that 
satisfied minimum value and met one or more of the affordability safe 
harbors described in paragraph (e) of this section) and the section 
4980H(b) applicable payment amount. Notwithstanding the foregoing, the 
aggregate amount of assessable payment determined under this paragraph 
(a) with respect to all employees of an applicable large employer for 
any calendar month may not exceed the product of the section 4980H(a) 
applicable payment amount and the number of full-time employees of the 
applicable large employer member during that calendar month (reduced by 
the applicable large employer member's ratable allocation of the 30 
employee reduction under Sec.  54.4980H-4(d).
    (b) Offer of coverage. For purposes of this section, the same 
rules, with respect to an offer of coverage for purposes of section 
4980H(a), apply. See Sec.  54.4980H-4(b).
    (c) Partial calendar month. If an applicable large employer member 
fails to offer coverage to a full-time employee for any day of a 
calendar month, that employee is treated as not offered coverage during 
that entire month. However, in a calendar month in which a full-time 
employee's employment terminates, if the employee would have been 
offered coverage if the employee had been employed for the entire 
month, the employee is treated as having been offered coverage during 
that month.
    (d) Applicability to applicable large employer member. The 
liability for an assessable payment under section 4980H(b) for a 
calendar month with respect to a full-time employee applies solely to 
the applicable large employer member that was the employer of that 
employee for that calendar month, provided that, if the employee was an 
employee of more than one applicable large employer member during that 
calendar month, the liability for the assessable payment under section 
4980H(b) is allocated among the different members in accordance with 
the number of hours of service the employee had from each such member 
for that calendar month. For a calendar month, an applicable large 
employer member may be liable for an assessable payment under section 
4980H(a) or under section 4980H(b), but may not be liable for an 
assessable payment under both section 4980H(a) and section 4980H(b).
    (e) Affordability--(1) In general. An employee who is offered 
coverage by an applicable large employer member may be eligible for a 
premium tax credit or cost reduction if that offer of coverage is not 
affordable within the meaning of section 36B(c)(2)(C)(i). Under section 
36B(c)(2)(C)(i), coverage under an employer-sponsored plan is 
affordable to a particular employee if the employee's required 
contribution (within the meaning of section 5000A(e)(1)(B)(i)) to the 
plan does not exceed 9.5 percent of the employee's household income for 
the taxable year. For this purpose, section 36B(d)(2)(A) defines the 
term household income to mean the modified adjusted gross income of the 
employee and any members of the employee's family (which would include 
any spouse and dependents) who are required to file a federal income 
tax return. Section 36B(d)(2)(B) and Sec.  1.36B-1(e)(2) of this 
chapter define the term modified adjusted gross income for this purpose 
as adjusted gross income (within the meaning of section 62) increased 
by--
    (i) Amounts excluded from gross income under section 911,
    (ii) The amount of any tax-exempt interest a taxpayer receives or 
accrues during the taxable year, and
    (iii) An amount equal to the portion of the taxpayer's social 
security benefits (as defined in section 86(d)) which is not included 
in gross income under section 86 for the taxable year.
    (2) Affordability safe harbors for section 4980H(b) purposes. The 
following affordability safe harbors apply solely for purposes of 
section 4980H(b), so that an applicable large employer member that 
offers minimum essential coverage providing minimum value will not be 
subject to an assessable payment under section 4980H(b) with respect to 
any employee receiving the premium tax credit or cost sharing reduction 
for a period for which the coverage is determined to be affordable 
under the requirements of an affordability safe harbor. This rule 
applies even if the applicable large employer member's offer of 
coverage that meets the requirements of an affordability safe harbor is 
not affordable for a particular employee under section 36B(c)(2)(C)(i) 
and a premium tax credit or cost-sharing is

[[Page 252]]

allowed or paid with respect to that employee
    (i) Conditions of using an affordability safe harbor. An applicable 
large employer member may use one or more of the affordability safe 
harbors described in paragraph (e)(2) of this section only if the 
employer offers its full-time employees and their dependents the 
opportunity to enroll in MEC under an eligible employer-sponsored plan 
that provides minimum value with respect to the self-only coverage 
offered to the employee. Use of any of the safe harbors is optional for 
an applicable large employer, and an applicable large employer member 
may choose to apply the safe harbors for any reasonable category of 
employees, provided it does so on a uniform and consistent basis for 
all employees in a category.
    (ii) Form W-2 safe harbor -(A) Full-year offer of coverage. An 
employer will not be subject to an assessable payment under section 
4980H(b) with respect to a full-time employee if that employee's 
required contribution for the calendar year for the employer's lowest 
cost self-only coverage that provides minimum value during the entire 
calendar year (excluding COBRA or other continuation coverage) does not 
exceed 9.5 percent of that employee's Form W-2 wages from the employer 
for the calendar year. Application of this safe harbor is determined 
after the end of the calendar year and on an employee-by-employee 
basis, taking into account the Form W-2 wages and the required employee 
contribution for that year. In addition, to qualify for this safe 
harbor, the employee's required contribution must remain a consistent 
amount or percentage of all Form W-2 wages during the calendar year (or 
for plans with fiscal year plan years, within the portion of each plan 
year during the calendar year) so that an applicable large employer 
member is not permitted to make discretionary adjustments to the 
required employee contribution for a pay period. A periodic 
contribution that is based on a consistent percentage of all Form W-2 
wages may be subject to a dollar limit specified by the employer.
    (B) Adjustment for partial-year offer of coverage. For an employee 
not offered coverage for an entire calendar year, the Form W-2 safe 
harbor is applied by adjusting the Form W-2 wages to reflect the period 
for which coverage was offered, then determining whether the employee's 
required contribution for the employer's lowest cost self-only coverage 
that provides minimum value, totaled for the periods during which 
coverage was offered, does not exceed 9.5 percent of the adjusted 
amount of Form W-2 wages. To adjust Form W-2 wages for this purpose, 
the Form W-2 wages are multiplied by a fraction equal to the number of 
calendar months for which coverage was offered over the number of 
calendar months in the employee's period of employment with the 
employer during the calendar year. For this purpose, if coverage is 
offered during at least one day during the calendar month, or the 
employee is employed for at least one day during the calendar month, 
the entire calendar month is counted in determining the applicable 
fraction.
    (iii) Rate of pay safe harbor. An applicable large employer member 
satisfies the rate of pay safe harbor with respect to an employee for a 
calendar month if the employee's required contribution for the month 
for the applicable large employer member's lowest cost self-only 
coverage that provides minimum value does not exceed 9.5 percent 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 salaried employees, monthly salary is used 
instead of 130 multiplied by the hourly rate of pay, and, solely for 
purposes of this paragraph (e)(2)(iii), an applicable large employer 
member may use any reasonable method for converting payroll periods to 
monthly salary. An applicable large employer member may use this safe 
harbor only to the extent it does not reduce the hourly wage of hourly 
employees or the monthly wages of salaried employees during the 
calendar year (including through the transfer of employment to another 
applicable large employer member of the same applicable large 
employer). For this purpose, if coverage is offered during at least one 
day during the calendar month, the entire calendar month is counted 
both for purposes of determining the assumed income for the calendar 
month and for determining the employee's share of the premium for the 
calendar month.
    (iv) Federal poverty line safe harbor. An applicable large employer 
member satisfies the Federal poverty line safe harbor with respect to 
an employee for a calendar month if the employee's required 
contribution for the calendar month for the applicable large employer 
member's lowest cost self-only coverage that provides minimum value 
does not exceed 9.5 percent of a monthly amount determined as the 
Federal poverty line for a single individual for the applicable 
calendar year, divided by 12. For this purpose, if coverage is offered 
during at least one day during the calendar month, the entire calendar 
month is counted both for purposes of determining the assumed income 
for the calendar month and for determining the employee's share of the 
premium for the calendar month. For this purpose, the applicable 
Federal poverty line is the Federal poverty line for the State in which 
the employee is employed.
    (v) Examples. The following examples illustrate the application of 
the affordability safe harbors described in paragraph (e)(2) of this 
section:

    Example 1. (Form W-2 wages safe harbor). (i) Facts. Employee A 
is employed by applicable large employer member Z consistently from 
January 1, 2015 through December 31, 2015. In addition, Z offers 
Employee A and his dependents minimum essential coverage during that 
period that meets the minimum value requirements. The employee 
contribution for self-only coverage is $100 per calendar month, or 
$1,200 for the calendar year. For 2015, Employee A's Form W-2 wages 
with respect to employment with Z are $24,000.
    (ii) Conclusion. Because the employee contribution for 2015 is 
less than 9.5% of Employee A's Form W-2 wages for 2015, the coverage 
offered is treated as affordable with respect to Employee A for 2015 
($1,200 is 5% of $24,000).
    Example 2. (Form W-2 wages safe harbor). (i) Facts. Employee B 
is employed by applicable large employer member Y from January 1, 
2015 through September 30, 2015. In addition, Y offers Employee B 
and his dependents minimum essential coverage during that period 
that meets the minimum value requirements. The employee contribution 
for self-only coverage is $100 per calendar month, or $900 for 
Employee B's period of employment. For 2015, Employee B's Form W-2 
wages with respect to employment with Y are $18,000. For purposes of 
applying the affordability safe harbor, the Form W-2 wages are 
multiplied by \9/9\ (9 calendar months of coverage offered over 9 
months of employment during the calendar year) or 1. Accordingly, 
affordability is determined by comparing the adjusted Form W-2 wages 
($18,000) to the employee contribution for the period for which 
coverage was offered ($900).
    (ii) Conclusion. Because the result is less than 9.5% of 
Employee B's Form W-2 wages for 2015, the coverage offered is 
treated as affordable with respect to Employee B for 2015 ($900 is 
5% of $18,000).
    Example 3. (Form W-2 wages safe harbor). (i) Facts. Employee C 
is employed by applicable large employer member X from May 15, 2015 
through December 31, 2015. In addition, X offers Employee C and her 
dependents minimum essential coverage during the period from August 
1, 2015 through December 31, 2015 that meets the minimum value 
requirements. The employee contribution for self-only coverage is 
$100 per calendar month, or $500 for Employee C's period of 
employment. For 2015, Employee C's Form W-2 wages with respect to 
employment with X are $15,000. For purposes of applying the 
affordability safe harbor, the Form W-2 wages are multiplied

[[Page 253]]

by \5/8\ (5 calendar months of coverage offered over 8 months of 
employment during the calendar year). Accordingly, affordability is 
determined by comparing the adjusted Form W-2 wages ($9,375 or 
$15,000 x \5/8\) to the employer contribution for the period for 
which coverage was offered ($500).
    (ii) Conclusion. Because $500 is less than 9.5% of $9,375 
(Employee C's adjusted Form W-2 wages for 2015), the coverage 
offered is treated as affordable with respect to Employee C for 2015 
($500 is 5.33% of $9,375).
    Example 4. (Rate of pay safe harbor). (i) Facts. Employee D is 
employed by applicable large employer member W from January 1, 2015 
through December 31, 2015. In addition, W offers Employee D and his 
dependents minimum essential coverage during that period that meets 
the minimum value requirements. The employee contribution for self-
only coverage is $85 per calendar month. Employee D is paid at a 
rate of $7.25 per hour (the minimum wage in Employer W's 
jurisdiction), for the entire year 2015. For purposes of applying 
the affordability safe harbor, W may assume that Employee D earned 
$942.50 per calendar month (130 hours of service multiplied by $7.25 
per hour). Accordingly, affordability is determined by comparing the 
assumed income per month ($942.50) to the employee contribution per 
month ($85).
    (ii) Conclusion. Because $85 is less than 9.5% of Employee D's 
assumed income, the coverage offered is treated as affordable with 
respect to Employee D for 2015 ($85 is 9.01% of $942.50).
    Example 5. (Rate of pay safe harbor). (i) Facts. Employee E is 
employed by applicable large employer member V from May 15, 2015 
through December 31, 2015. In addition, V offers Employee E and her 
dependents minimum essential coverage from August 1, 2015 through 
December 31, 2015 that meets the minimum value requirements. The 
employee contribution for self-only coverage is $100 per calendar 
month. From May 15, 2015 through October 31, 2015, Employee E is 
paid at a rate of $10 per hour. From November 1, 2015 through 
December 31, 2015, Employee E is paid at a rate of $12 per hour. For 
purposes of applying the affordability safe harbor V may assume that 
Employee E earned $1,300 per calendar month (130 hours of service 
multiplied by the lowest hourly rate of pay for the calendar year, 
or $10). Accordingly, affordability is determined by comparing the 
assumed income ($1,300 per month) to the employee contribution ($100 
per month).
    (ii) Conclusion. Because $100 is less than 9.5% of Employee E's 
assumed monthly income, the coverage offered is treated as 
affordable with respect to Employee E for 2015 ($100 is 7.69% of 
$1,300).
    Example 6. (Federal poverty line safe harbor). (i) Facts. 
Employee F is employed by applicable large employer member W from 
January 1, 2015 through December 31, 2015. In addition, W offers 
Employee F and his dependents minimum essential coverage during that 
period that meets the minimum value requirements. W uses the look-
back measurement method. Under that method as applied by W, Employee 
F is treated as a full-time employee for the entire calendar year 
2015. Employee F is regularly credited with 35 hours of service per 
week but is credited with only 20 hours of service during the month 
of March, 2015 and only 15 hours of service during the month of 
August, 2015. Assume for this purpose that the Federal poverty line 
for 2015 for an individual is $11,170. With respect to Employee F, W 
determines the monthly employee contribution for employee single-
only coverage for each calendar month of 2015 as an amount equal to 
9.5% multiplied by $11,170, which is $1,061.15, and that amount is 
then divided by 12, and the result is $88.43.
    (ii) Conclusion. Regardless of Employee F's actual wages for any 
calendar month, including the months of March, 2015 and August, 2015 
when Employee F has lower wages because of significantly lower hours 
of service, the coverage under the plan is treated as affordable 
with respect to Employee F.

    (f) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.


Sec.  54.4980H-6  Administration and Procedure

    (a) In general. [Reserved]
    (b) Effective/applicability date. This section is applicable for 
periods after December 31, 2013.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 5. The authority citation for part 301 continues to read in part 
as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 6. Section 301.7701-2 is amended as follows:
0
1. In paragraph (c)(2)(v)(A)(3), the language ``and 4412; and'' is 
removed and ``and 4412;'' is added in its place.
0
2. In paragraph (c)(2)(v)(A)(4), the language ``or 6427.'' is removed 
and ``or 6427; and'' is added in its place.
0
3. Paragraphs (c)(2)(v)(A)(5) and (e)(6)(iii) are added.
    The additions read as follows:


Sec.  301.7701-2  Business entities; definitions.

* * * * *
    (c) * * *
    (2) * * *
    (v) * * *
    (A) * * *
    (5) Assessment and collection of an assessable payment imposed by 
section 4980H and reporting required by section 6056.
* * * * *
    (e) * * *
    (6) * * *
    (iii) Paragraph (c)(2)(v)(A)(5) of this section applies for periods 
after December 31, 2013.
* * * * *

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-31269 Filed 12-28-12; 4:15 pm]
BILLING CODE 4830-01-P