Starting in 2014, the “pay-or-play” rules under Internal Revenue Code section 4980H will apply to large employers who employ an average of 50 full-time or full-time equivalent employees. Proposed regulations released earlier this year provide important details regarding how the 4980H rules apply to controlled groups.

Determinations made on aggregate basis.  Two determinations under the proposed regulations are made on an aggregate controlled group basis:

  1. Whether a member of a controlled group is considered a large employer (that is, an employer with at least 50 full-time employees) is determined by counting all employees within the controlled group. 
  2. A large employer is permitted a reduction of 30 full-time employees per month for purposes of calculating penalties due for failing to offer coverage under 4980H(a).  This 30-employee reduction must be done ratably across all members of a controlled group based on each member’s number of full-time employees, so employers can’t chose which members will benefit from the reduction.  However, if the controlled group has more than 30 members and the ratable allocation to some members is greater than zero but less than one, the proposed regulations allow rounding up to one employee for that member—which could result in an overall reduction to all members of more than 30 employees. 

Separate 4980H calculation and liability for members.  Compliance with and liability under 4980H is otherwise determined separately for each member of the controlled group.  For example, if a controlled group is considered a large employer and consists of a parent corporation and 20 subsidiary corporations, there will be 21 different determinations regarding whether each member (the parent plus 20 subsidiaries) owes a payment for its full-time employees.  Any penalties would only be assessed for a member’s own full-time employees, and each group member would be liable for only for its own separate 4980H payment.

De minimis rule.  The proposed regulations provide for a “de minimis” rule, which treats an employer as offering coverage to all full-time employees if it offers coverage to all but 5% (or, if greater, 5) of its full-time employees.  It appears this rule applies on a member-by-member basis as well, and would not be applied by looking at whether the controlled group as a whole offers coverage to 95% of full-time employees.

Hour of service definition.  The proposed regulations note that when determining whether an employee is a full-time employee, all hours of service performed for members of the controlled group must be taken into account.  If an employee is employed by more than one member during a month, the liability for penalties under 4980H(b) is allocated among the members in accordance with the hours of service that the employee had with each member. 

Code section 6056 Reporting.  Theagencies have not yet issued regulations regarding reporting under Code section 6056, which requires large employers to file an information return with the IRS reporting and certifying certain information about health care coverage offered to employees.  The proposed regulations did note that the Code section 6056 regulations are expected to apply to each applicable large employer member as defined for purposes of 4980H.