Affordable Care Act Implementation Issues

Transcription

1 Affordable Care Act Implementation Issues Friday, May 9, 2014 General Session; 10:30 a.m. 12:00 p.m. Anne C. Hydorn, Hanson Bridgett League of California Cities 2014 Spring Conference Renaissance Esmeralda, Indian Wells

2 Notes: League of California Cities 2014 Spring Conference Renaissance Esmeralda, Indian Wells

3 The Affordable Care Act: Implementation of the Employer-Shared Responsibility Rules by Anne Hydorn I. INTRODUCTION In 2010, Congress passed comprehensive health care reform legislation. 1 This legislation significantly changes health care policy in the United States. The law, often called Obamacare or the ACA, includes an array of new requirements for health plans, employers, and individuals. These requirements span from as early as 2010 all the way through Although the law has continued to be a political hot-button since its inception you might recall the Fall 2013 government shutdown during which health care reform sat front and center - it appears to be here to stay for now. Accordingly, affected employers must continue to grapple with its many new requirements. Of significance, many employers across the country must begin to comply with the ACA's employer-shared responsibility rules beginning January 1, (These rules were originally scheduled to go into effect on January 1, There is a continued implementation delay to January 1, 2016, for employers with 50 to 99 full-time equivalent employees.) Employer-shared responsibility requires large employers to offer adequate health care coverage or pay substantial penalties. 2 The law affects all large employers whether they are public, private or nonprofit. Only small employers are exempt. While the idea of offering health care coverage or paying a tax may seem rather simple in concept, implementing the rules has the potential to be incredibly complex depending on an employer s particular facts and circumstances. On February 12, 2014, the IRS published final regulations relating to employer-shared responsibility, along with a set of Frequently Asked Questions. 3 This article provides information on these rules, with a special emphasis on issues that may be of particular relevance to government employers. II. ARE YOU A LARGE EMPLOYER? A. General Rules Most City governments will likely meet the definition of a large employer under the ACA. In general, whether an employer is a "large" employer in 2015 depends on whether it employed an average of 50 or more full-time equivalent employees in the prior year. 4 Further, all members of a controlled group are treated as one employer. 5 The regulations require that employers use 1 The Patient Protection and Affordable Care Act, Public Law No (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law No , (124 Stat (2010)). 2 Code 4980H(a),(b) Fed. Reg (Feb. 12, 2014); Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act at Responsibility-Provisions-Under-the-Affordable-Care-Act (as last visited on March 16, 2014). 4 Code 4980H(c)(2)(A). 5 The final regulations have reserved on the application of the controlled group rules to government agencies, which would require aggregating the employee count of certain government entities to determine whether each member of the controlled group is a large employer. The regulations permit government agencies to apply a reasonable, good faith interpretation of those rules when determining their status as a large employer. Members of a controlled group are only aggregated for determining whether each member of the controlled group is a large employer under the rules. The determination of whether an employer is subject to a penalty (and the amount of any penalty) is (footnote continued)

4 the common-law standard for determining who is an employee. 6 Although this is a generally difficult standard to apply in some cases, it is the same standard employers must use for determining who their employees are for employment tax purposes. Most employers, therefore, will be familiar with that analysis. (For example, an employer must use the common-law standard for making a determination about whether an individual is an employee as opposed to an independent contractor). Under the final regulations, an employer may use a special look-back period of any consecutive 6-month period in 2014, rather than the entire calendar year to determine whether it had 50 or more full-time equivalent employees in that year. 7 In future years, the employer must use the entire calendar year to make its determination. In many cases, an employer will know without doing any math whether it meets the status of a large employer. But for those entities that are unsure, the regulations provide detailed rules for making this determination. Be forewarned, even determining whether the rules apply at all can be complex for some employers. B. Counting Full-Time Equivalent Employees To calculate the employer s total full-time equivalent employees, the employer must first count its actual full-time employees for each month. For this purpose, a full-time employee means an employee who is employed an average of at least 30 hours of service per week in a calendar month or a total of 130 hours of service in a calendar month. 8 The ACA is concerned with actual hours worked or paid not scheduled hours or any other method the employer uses for labeling its employees as full-time or part-time. This may cause a disconnect between what the ACA requires as opposed to what the employer s own internal personnel rules or collective bargaining agreements require as full-time. And it requires the employer to have good documentation to support its determinations. After totaling its actual full-time employees, the employer must also take into consideration its part-time employees hours each month to determine the entity's total "full-time equivalent" employees. The Treasury Regulations provide a formula for how to take into account part-time employees. To perform this calculation, the employer aggregates the number of hours of service for employees who were not full-time (but not more than 120 hours of service for any employee in a month), and then divides that number by The employer must take into account fractions for each month. 10 Finally, the employer adds together the number of full-time employees to the number of full-time equivalent employees for each calendar month in the preceding calendar year, and divides that total by 12. The employer must round the result to the next lowest number. 11 If the result is less than 50, the employer is not a large employer for the current calendar year. If the answer is 50 or more, the employer is a large employer for the current calendar year, unless the seasonal worker exception applies. 12 determined on a member-by-member basis. In other words, the IRS will assess each controlled group member separately by taking into account each entity s offer of coverage (or lack thereof). 6 Treas. Reg H-1(a)(15) Fed. Reg (Feb. 12, 2014). 8 Treas. Reg H-1(a)(21). 9 Treas. Reg H-2(c)(2). 10 Id. 11 Treas. Reg H-2(b)(1). 12 The Treasury Regulations have special rules for excluding certain seasonal workers from the "50 employee" count. See Treas. Reg H-2(b)(2).

5 C. Seasonal Worker Exception If the employer is a large employer for 120 days or less during the calendar year, and the reason is because it employed seasonal workers during those months, the employer may disregard the seasonal workers in its count for determining large employer status. 13 This is called the seasonal worker exception. 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 (s)(1) (generally relating to employment that pertains to or is of the kind exclusively performed at certain seasons or periods of the year and which, from its nature, is not continuous or carried on throughout the year), and retail workers employed exclusively during holiday seasons. 14 The final regulations provide that employers can apply a reasonable, good faith interpretation of the rule. Due to the potentially large penalties for getting it wrong, however, we recommend exercising caution or seeking legal advice if an employer has any question pertaining to this exception. Here is a simple, but illustrative example of how to determine large employer status. The final regulations also include a number of examples of how these calculations are performed. 15 EXAMPLE D. Effective Date Delayed for Large Employers with Full-time Equivalents The final rules provide an additional one-year implementation delay for large employers with full-time equivalent employees in the prior year. 16 Those employers must comply by January 1, But special conditions apply for these smaller large employers to take advantage of the extra delay. 13 Treas. Reg H-2(b)(2). 14 Treas. Reg H-1(a)(39). 15 Treas. Reg H-2(d) Fed. Reg (Feb. 12, 2014).

6 The employer must base its measurement of full-time equivalents on its 2014 data. Beginning February 9, 2014, through December 31, 2014, the employer may not reduce the hours or size of the workforce to take advantage of the implementation delay. (But employers can make workforce reductions for bona fide business reasons without violating this condition). The employer cannot eliminate or materially reduce the coverage it offers as of February 9, 2014 (special rules apply for determining whether there has been an elimination or a material reduction). The employer certifies to the IRS that it has met these conditions on an IRS form developed for this purpose. If this size employer does not meet these special conditions, it must comply with the employershared responsibility rules on January 1, 2015, along with all other large employers. III. PENALTIES UNDER THE EMPLOYER-SHARED RESPONSIBILITY RULES Under the employer-shared responsibility rules, covered large employers must offer adequate coverage or be subject to potential tax penalties. There are two ways a large employer may be subject to a tax penalty under these rules: (1) by failing to offer coverage to an adequate number of its full-time employees Penalty A, or (2) by offering coverage, but providing coverage that is not of minimum value or is unaffordable Penalty B. A. Penalty A Basics: Failure to Offer Penalty Every "large employer" must offer minimum essential coverage to at least 95% of its full-time employees and their dependent children under age 26 to avoid a $2,000 per year penalty for every full-time employee (less 30). 17 The first 30 full-time employees are disregarded. This penalty is commonly called the A Penalty. (For the year 2015 only, the final regulations reduce the 95% rule to 70%, and the first 80 full-time employees are disregarded for purposes of calculating the penalty amounts.) 18 For example, if the employer provides qualifying coverage to 94% of its full time employees, the employer will not have satisfied the rule and the employer may owe penalties. Employers who meet the 95% rule can choose not to offer coverage to the other 5% of its full-time employees and still be in compliance. Some employers may wish to use this 5% leeway as part of their implementation planning strategy. For those employers that do not meet the rule, the penalty tax is triggered when one of the employer s full-time employees receives subsidized health insurance from a state health insurance exchange. 19 In California, the state health insurance exchange is called Covered California. Covered California is the state marketplace, where individuals and small employers can purchase health insurance. 1. Minimum Essential Coverage Remember that the offer of coverage to 95% of full-time employees and their dependents must be minimum essential coverage. In general, minimum essential coverage means an 17 The penalty is actually imposed on a monthly basis. In this article, the annualized amount is used for illustrative purposes. An employer can correct an early failure to comply and avoid the full year's penalty. Treas. Reg H-4(a); Treas. Regs H-4(b) Fed. Reg (Feb. 12, 2014). 19 Treas. Reg H-4(a).

7 employer-provided group health plan. 20 This definition is very broad. Benefits that are excepted benefits are excluded and will not satisfy the rule. 21 Excepted benefits generally include plans like certain stand-alone dental and vision plans, or a salary-reduction only health flexible spending account under a Code Section 125 cafeteria plan. 22 Other limited benefit plans are also included in the excepted benefit definition Dependents Employers must also offer the coverage to the employee s dependents. Under the final regulations, a dependent means a son, daughter, adopted child or a child placed for adoption up to age The proposed regulations included both stepchildren and foster children, but the final regulations removed those categories of children from the definition in response to commenters concerns that those groups of children often have coverage elsewhere. The final regulations also confirmed that a spouse is not a dependent for purposes of these rules. Therefore, employers can choose not to offer coverage to spouses, and this will not subject them to penalties. The rules also exclude children who are not U.S. citizens or nationals, unless they are a resident of the U.S., Canada or Mexico. Finally, they confirm that employers may rely on the employee s representation about children and their ages, thereby reducing the administrative burden on employers. If an employer who does not currently offer coverage to all or some dependents takes steps during the 2015 plan year to satisfy the dependent coverage requirements, this will be adequate to avoid penalties on that basis for 2015 only. 25 This special transition rule will not apply, however, if the employer offered dependent coverage in 2013 or B. Penalty B Basics: Inadequate or Unaffordable Coverage The second way an employer may be subject to a penalty under the employer-shared responsibility rules is if a large employer offers minimum essential health coverage to 95% of its full-time employees and their dependents (and thereby avoids the A Penalty), but the coverage it offers is either not minimum value or unaffordable. In that case, the employer may be subject to a $3,000 per year penalty for each full-time employee who gets subsidized health insurance from a state health insurance exchange (the B Penalty ). 27 The employer will never, however, pay more under the B Penalty than it would have paid under the A Penalty. 28 This is because the B Penalty is capped at the A Penalty dollar amount. 1. Minimum Value To be of minimum value, a plan must cover at least 60% of the benefit costs. 29 A plan that covers 60% of benefit costs is often labeled a bronze plan. There are several options for determining whether an employer plan meets minimum value: (1) a minimum value calculator, Treas. Reg H-1(a)(27). 21 Code 5000A(f)(3). 22 Code 9832(c). 23 Id. (e.g., benefits for long-term care and fixed indemnity insurance). 24 Treas. Reg H-1(a)(12) Fed. Reg (Feb. 12, 2014). 26 Id. 27 Again, this is the total annual amount that might apply, but the penalties are actually determined on a month-bymonth basis. Code 4980H(b); Treas. Reg H Code 4980H(b)(2) Fed. Reg (Feb. 12, 2014). 30 Available at

8 (2) designed-based safe harbors (under development), and (3) an actuarial certification. 31 Employers with insured plans may also consider relying on their insurance provider s representation about the minimum value status of its plan. 2. Affordability Employers will likely find the affordability test to be a more challenging test to apply under Penalty B than the minimum value test. The general rule is that a plan is affordable if the employee s contribution for self-only coverage of the employer s lowest cost plan that provides minimum value does not exceed 9.5% of the employee s household income. 32 In other words, the focus is on the employee s cost for his or her own coverage under the employer s least costly plan. The cost for the employee s spouse or dependent coverage has no bearing on affordability from the employer s perspective. Therefore, an employer could avoid penalties by ensuring that the coverage is affordable for the employee, and still charge the employee the full cost for spouses or dependents. The IRS realized early on that it would be difficult for employers to try and determine affordability based on an employee s household income, as that information is generally unknown to employers. Further, it would be administratively burdensome for employers to have to collect information to make that determination. Therefore, to provide certainty to employers, the IRS provided three safe harbor methods for determining affordability. The employer s use of any one of these methods is optional. Employers can use the safe harbors for any reasonable category of employees, provided it does so on a uniform and consistent basis (e.g., by job category or geographical location). 33 a. W-2 Box 1 Wages Method The employer compares the employee s cost for self-only coverage of the lowest cost plan for the year to 9.5% of the employee s W-2 Box 1 wages. 34 This is a look-back method after W-2 wages are known. So, employers who use this method will have to estimate W-2 wages for planning purposes when determining affordability. The final regulations also permit adjustments for partial years of coverage. b. Rate of Pay This is a monthly method under which the employer assumes the monthly income rate. For each month, the employer compares the employee s cost for self-only coverage of the lowest cost plan to 9.5% of the amount that is equal to 130 hours multiplied by the lower of (i) the employee s hourly rate of pay as of the first of the coverage period (usually the first day of the plan year), or (ii) the employee s lowest hourly rate of pay during the calendar month. For non-hourly employees, employers use the monthly salary as of the first day of the coverage period. Unlike for hourly employees, no reduction in salary can be taken into account. The rules indicate that an employer cannot use this method for salaried employees who have a reduction in pay after the coverage period begins The actuarial certification must be provided from a member of the American Academy of Actuaries. 79 Fed. Reg (Feb. 12, 2014). 32 Code 36B(c)(2)(C)(i); Treas. Reg H-5(e)(2). 33 Treas. Reg H-5(e)(2)(i). 34 Treas. Reg H-5(e)(2)(ii). 35 Treas. Reg H-5(e)(2)(iii).

9 c. Federal Poverty Line Employers compare the employee s monthly cost for self only coverage under the employer s lowest cost plan to 9.5% of the amount that is equal to the federal poverty line for a single individual for the calendar divided by Employers can use the amount published under the federal poverty line in effect within six months before the first day of the plan year. These amounts are published in the Federal Register. C. Eligibility for Federal Subsidies at the Exchange The event that the triggers the tax for an employer is when a full-time employee goes to a state exchange (e.g., Covered California) and receives a federal subsidy toward the cost of the insurance he or she purchases. A subsidy may be available if: the employee has household income lower than 400% of the federal poverty line; 2 person family income up to $62,920 (2014) 4 person family income up to $95,400 6 person family income up to $127,880 the employee is ineligible for Medicaid (or other government-sponsored programs); and the employee is ineligible for employer-provided coverage or is eligible for employerprovided coverage, but it is not of minimum value or is unaffordable. If the employer provides adequate coverage under the rules, this will render the employee ineligible for a federal subsidy. If no employee is eligible for federal subsidies on the exchange, the penalty taxes should not be triggered. A couple of simple examples will illustrate the potential liability exposure involved when an employer does not satisfy the tests for Penalty A or Penalty B. D. Penalty Examples 1. Penalty A Example (2016) Employer has 1,000 full-time employees (as determined under the ACA rules). The employer either does not offer coverage at all, or offers coverage to less than the required 95% of full-time employees and required dependents. One full-time employee receives subsidized coverage through the exchange (the event that triggers the tax). Penalty due to the IRS is $2,000 X (1,000-30) or $1,940,000. These potential penalties are quite significant. Employers need to be extremely careful that they do not provide and subsidize coverage for a majority of its full-time employees, but then accidentally miss the 95% coverage rule. In that case, the employer would not only have paid for the cost of health coverage, but could potentially owe thousands or millions of dollars in IRS penalties. This would be a worst case scenario, and far different than the scenario in which an employer simply and intentionally chooses to not offer coverage and pay the penalties instead. Careful planning and recordkeeping is crucial, because determining whether 95% of the employer s full-time employees are eligible for your health care program will be a critical task. 36 Treas. Reg H-5(e)(2)(iv).

10 2. Penalty B Example (2016) An employer has 1,000 full-time employees. That employer offers minimum essential coverage to all 1000 employees and required dependents (i.e., 100% of its full-time employees) and, therefore, meets the standards for Penalty A. The coverage is also of minimum value, but is unaffordable for 20 employees. All of those 20 employees receive a federal subsidy through the exchange (the event that triggers the tax). Penalty due to the IRS is $3,000 X 20 or $60,000. Although potentially far less than Penalty A, the employer will have to consider Penalty B costs into its overall planning strategies, if it decides to offer less than minimum value or unaffordable coverage. IV. MEASURING FULL-TIME EMPLOYEES Some of the most complicated rules under the employer-shared responsibility rules involve determining who your full-time employees are and who must be offered qualifying coverage to avoid penalties. This article provides the basic concepts and overview of how to measure fulltime employees under the final regulations, but there are many other detailed and complex rules that might be relevant depending on your particular facts and circumstances. Therefore, you are strongly encouraged to seek advice from legal counsel or other expert advisors for advice in dealing with your particular facts and circumstances. A. The Basics Remember that the ACA is concerned about whether employers are offering qualifying coverage to its full-time employees. The basic definition of full-time for purposes of determining potential liability for a penalty tax is the same as for determining whether an employer is a large employer. An employee is full-time if he or she works 30 hours of service per week or 130 hours of service in a calendar month. An employer must count all hours of service for which an employee is paid or entitled to pay, including for paid time off. 37 Again, scheduled hours or any other definition of who is full-time under the employer s personnel policies or collective bargaining agreements is irrelevant under the ACA. After the IRS issued proposed regulations, there was much concern among government agencies about volunteer workers. In response, the final rules exclude hours of service by bona fide volunteers. These are individuals who are volunteers of a government entity whose only compensation is in the form of (1) reimbursements or a reasonable allowance for reasonable expenses incurred in their services, or (2) reasonable benefits (including length of service awards), and nominal fees, customarily paid by similar entities in connection with the performance of volunteer services. 38 The exclusion also applies to volunteer firefighters and emergency medical providers. 39 If an employer reasonably expects an employee to be full-time upon hire, the employer must offer coverage to that employee by the first day of the month immediately following the conclusion of his or her first three full calendar months of employment. 40 This reasonable expectation determination is based on the facts and circumstances, which may include whether the employee is replacing an employee who was or was not a full-time employee, the extent to which employees in the same or comparable positions are or are not full-time employees, and whether the job was advertised, or otherwise communicated to the new hire or otherwise 37 Treas. Reg H-1(a)(24). 38 Treas. Reg H-1(a)(7) Fed. Reg (Feb. 12, 2014). 40 Treas. Reg H-3(d)(2)(ii).

11 documented as requiring hours of service that would average 30 hours (or more) hours of service per week. 41 For those employees an employer does not reasonably expect to be full-time variable hour part-time, and seasonal employees employers can determine whether they reach full-time status by measuring their hours of service on a month-by-month basis or by using a special look-back measurement period. 42 Although an employer can measure full-time status on a monthly basis, this would mean that employees can flip in and out of full-time status (and coverage) each month. It can be administratively difficult to administer this, and many employers with insured plans would need to coordinate with their insurance carriers to determine whether that would even be feasible. Accurate recordkeeping will be crucial for these determinations in either case in the event the IRS imposes a penalty assessment. B. Measurement, Administrative, and Stability Periods under the Look-Back Method 1. General Rules There are three different periods that apply when measuring employee status under the lookback method: Measurement Period the look back period during which an employer records actual hours and measures status; Administrative Period the period an employer uses for administering the results and offering coverage (e.g., open enrollment); and Stability Period the period that a full time employee must be offered coverage, regardless of their full-time or part-time status during that period so long as he or she remains an employee. An employer who chooses to use the look-back measurement period may choose to measure employees full-time status over a period of at least three and as long as 12 months. 43 If the employer determines that the employee met full-time status during the chosen measurement period, then the employee must treat the employee as full-time and offer the employee coverage during a subsequent stability period. Each measurement period has a subsequent and corresponding stability period. The stability period must be at least six consecutive calendar months, but must not be shorter in duration than the standard measurement period. 44 Examples: Measurement Period = 3 months; Stability Period = 6 months Measurement Period = 5 months; Stability Period = 6 months Measurement Period = 9 months; Stability Period = 9 months Measurement Period = 12 months; Stability Period = 12 months If the period of coverage immediately followed the measurement period, there would be no time to: (a) notify the employee of coverage availability, (b) let the employee make health care elections, and (c) implement payroll changes for premium deductions. Therefore, the final regulations permit employers to use an administrative period between the measurement 41 Id. 42 Treas. Reg H Treas. Reg H-1(a)(46). 44 Treas. Reg H-3(d)(1)(iii).

12 period and stability period (when coverage must become available). 45 This period can be up to 90 days after the end of the measurement period. 46 Employers can design their measurement, administrative, and stability periods so that the administrative period overlaps with the employer s annual open enrollment period. For most employers, this is typically in the fall, which generally corresponds with a January 1 coverage start date. 2. Common Example: 12-Month Measurement Period Many employers will choose to use a 12-month measurement period. It s administratively simple, and generally fits with one open enrollment period per year. If an employer uses a sixmonth measurement period, the employer might need to conduct two open enrollment periods per year. Here s an example of how an employer might design its program using a 12-month measurement period: Measurement Period (measure status): October 15 October 14 Administrative Period (administer results): October 15 December 31 (less than 90 days) Stability Period (offer coverage) January 1 December 31 There are many other rules relating to how employers must deal with new hires, rehires, seasonal employees, short-term employees, staffing agency workers, leaves of absences, and employees in high turn-over positions. Again, employers are strongly encouraged to seek advice from legal counsel or other expert advisors for advice in dealing with their particular facts and circumstances. The scope of this article is to provide employers with a general sense of the rules that apply for complying with the employer-shared responsibility rules. Below is a discussion, however, of particular categories of employees that may require some special consideration. C. Some Categories of Employees May Require Careful Consideration As employers assess whether they are offering minimum essential coverage to at least 95% of their full-time employees and dependents (as defined under the ACA), there may be particular categories of employees and workers that could represent a significant percentage of the workforce that should be examined carefully to avoid inadvertently failing to offer qualifying coverage to 95% of the ACA-covered workforce. 45 Treas. Reg H-3(d)(1)(vi). 46 Id.

13 1. On-Call and Per Diem Since the ACA rules for determining full-time are strictly looking at hours worked, not employee classifications, if individuals in classifications such as on-call and per diem work significant amounts of time during the year, they may fall into the full-time employee definition under the ACA. Under personnel policies and bargaining agreement terms, these groups may not be provided benefits. Under the ACA, there is only a 5% allowance for excluding employees who average 30 hours a week during a month (i.e., those employees who are full-time as defined under the ACA). If the employer uses a significant number of on-call and per diem workers who are excluded from coverage under health care plans, this may cause a problem in meeting the ACA requirements. This could be particularly problematic if the employer were to have to consider providing health coverage, since, for example, salary rates for per diem workers are often set higher in exchange for not providing benefits. The final regulations indicate that the IRS is still considering issues that on-call employees raise. Until the IRS provides more guidance, employers must use reasonable methods for crediting hours of service to determine whether on-call employees are full-time Independent Contractors/Staffing Agency Workers As discussed above, an employer must determine who their employees are based on the common-law standard. The IRS often examines employment situations during an employment tax audit and asserts deficiencies based on the employer's misclassification of workers as independent contractors rather than employees. Thus, employers have an even more potentially expensive reason to carefully assess the employer/employee relationship with all individuals, particularly those providing services directly to the employer as independent contractors. This includes determining whether any staffing agency workers are common law employees. In addition, the final rules provide that if an employer pays an additional amount to a staffing agency under its staffing agency contract to ensure that the staffing agency is providing the individual with qualifying health insurance coverage, then this will qualify as the employer s offer of coverage to meet the ACA s requirements (e.g., if the individual is the employer s common law employee under IRS standards) Other Staffing Issues Employers who have a substantial number of part time employees, low wage employees, high turnover employees, seasonal employees and perhaps "contractors" as well, will have administrative difficulties in ensuring compliance with the new rules. Each of these types of employees can cause special ACA compliance issues that employers must watch carefully to avoid incurring significant penalties. V. PREPARING FOR EMPLOYER-SHARED RESPONSIBILITY IN 2015 Every large employer with 100 or more full-time employees needs to begin preparing immediately for the January 1, 2015, operational date. To meet this date, the typical employer with a Fall 2014 health care open enrollment period needs to determine how to count each employee's hours of service in accordance with the complex new employer-shared responsibility rules under the ACA. To count hours under these complex rules, the employer will need to review its IT and payroll systems, because it may take time to change these, if required. Before deciding whether to change payroll and human resource systems, the employer will need to Fed. Reg (Feb. 12, 2014). 48 Treas. Reg H-4(b)(2).

14 know what to count and why, and develop its strategy for meeting the employer-shared responsibility rules. Gathering the required information, understanding the rules, applying the rules to each employer's particular situation, as well as assessing an employer's particular tax risk, will take time. To avoid last minute scrambling, an employer will need to work quickly to avoid penalties beginning January 1, The IRS will enforce the penalties. 49 Unfortunately, the information that the IRS will get for enforcement from the newly created state and federal health exchanges may not be accurate, at least in the beginning. The burden will be on each employer to demonstrate to the IRS that no penalties are due, or that if any are due, the correct amount is being assessed. To prevail with the IRS, good records are critical. Because the IRS has already indicated informally that it is planning to audit for ACA compliance, it is important not only to capture the data that is needed for compliance on January 1, 2015, but also to capture information in a way that meets the IRS audit requirements. The time to start preparing for the complicated tax rules under the ACA s new shared responsibility provisions is today. *********** Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 49 Code 4980H(d)