Department of Treasury Publishes Final Rule on Shared Responsibility for Employers Regarding Health Coverage

[Federal Register Volume 79, Number 29 (Wednesday, February 12, 2014)]
[Rules and Regulations]
[Pages 8543-8601]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-03082]



[[Page 8543]]

Vol. 79

Wednesday,

No. 29

February 12, 2014

Part II

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; Final 
Rule

Federal Register / Vol. 79, No. 29 / Wednesday, February 12, 2014 / 
Rules and Regulations

[[Page 8544]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 54, and 301

[TD 9655]
RIN 1545-BL33


Shared Responsibility for Employers Regarding Health Coverage

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations providing guidance to 
employers that are subject to the shared responsibility provisions 
regarding employee health coverage under section 4980H of the Internal 
Revenue Code (Code), enacted by the Affordable Care Act. These 
regulations affect employers referred to as applicable large employers 
(generally meaning, for each year, employers that had 50 or more full-
time employees, including full-time equivalent employees, during the 
prior year). Generally, under section 4980H an applicable large 
employer that, for a calendar month, fails to offer to its full-time 
employees health coverage that is affordable and provides minimum value 
may be subject to an assessable payment if a full-time employee enrolls 
for that month in a qualified health plan for which the employee 
receives a premium tax credit.

DATES: Effective date: These regulations are effective February 12, 
2014.
    Applicability Dates: For dates of applicability, see section XVI of 
this preamble, Sec. Sec.  54.4980H-1(b), 54.4980H-2(f), 54.4980H-3(i), 
54.4980H-4(h), 54.4980H-5(g), and 54.4980H-6(b).

FOR FURTHER INFORMATION CONTACT: Kathryn Johnson or Shad Fagerland, 
(202) 317-6846 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Sections I through IV of the preamble (``Background'') describe 
section 4980H, including previously issued guidance under section 
4980H, as well as related statutory provisions. Sections V through XIV 
of the preamble (``Explanation and Summary of Comments'') describe the 
comments received on the proposed regulations and explain amendments to 
the proposed regulations. Section XV of the preamble (``Transition 
Relief and Interim Guidance'') provides certain transition relief and 
interim guidance under section 4980H, and section XVI of the preamble 
provides information on the effective date for and reliance on these 
final regulations.

I. Shared Responsibility for Employers (Section 4980H)

A. In general

    Section 4980H was added to the Code by section 1513 of the Patient 
Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 
(2010)), was amended by section 10106(e) and (f) of the Patient 
Protection and Affordable Care Act, was further amended by section 1003 
of the Health Care and Education Reconciliation Act of 2010, Public Law 
111-152 (124 Stat. 1029 (2010)), and was 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 1513(d) of the Affordable Care Act 
provides that section 4980H applies to months beginning after December 
31, 2013; however, Notice 2013-45 (2013-31 IRB 116), issued on July 9, 
2013, provides transition relief for 2014 with respect to section 
4980H.
    Section 4980H applies only to applicable large employers. 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), as well as full-
time employees, are taken into account. As set forth in section 
4980H(c)(2)(E), the number of an employer's FTEs is determined based on 
the hours of service of employees who are not full-time employees. 
Under section 4980H(c)(2)(C), the determination of whether an employer 
that was not in existence in the preceding calendar year is an 
applicable large employer is based on the average number of employees 
that it is reasonably expected the employer will employ on business 
days in the current calendar year.
    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 (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). 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 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. The assessable payment under section 4980H(a) 
is equal to the number of all full-time employees (excluding 30 full-
time employees) multiplied by one-twelfth of $2,000 for each calendar 
month, 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 the employee on an Affordable Insurance Exchange (Exchange) \1\ 
multiplied by one-twelfth of $3,000 for each calendar month. In no 
case, however, may the liability under section 4980H(b) exceed the 
maximum potential liability under section 4980H(a). Generally, 
liability under section 4980H(b) 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,\2\ 
the coverage \3\ offered by the employer is not affordable within the 
meaning of section 36B(c)(2)(C)(i) or does not provide minimum value 
(MV) within the meaning of section 36B(c)(2)(C)(ii). An employee's 
receipt of a premium tax credit under section 36B (premium tax credit) 
with respect to coverage for a dependent only will not result in 
liability for the employer under section 4980H.
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    \1\ An Exchange is also referred to in other published guidance 
as a Marketplace.
    \2\ For simplicity, references in this preamble to full-time 
employees certified as having received a premium tax credit include 
full-time employees receiving the premium tax credit or the cost-
sharing reduction because, in connection with Exchange coverage, 
only individuals who qualify for the premium tax credit can qualify 
for a cost-sharing reduction.
    \3\ For purposes of this preamble, the term ``coverage'' means 
MEC.
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B. Previously issued guidance

    During 2011 and 2012, the Treasury Department and the IRS published 
four notices, each of which outlined potential approaches to future 
guidance

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under section 4980H and requested public comments: (1) Notice 2011-36 
(2011-21 IRB 792) (addressed the definition of the terms employer, 
employee, and hour of service and requested comments on an approach to 
use an optional look-back measurement method for determining full-time 
employee status); (2) Notice 2011-73 (2011-40 IRB 474) (requested 
comments on a health coverage affordability safe harbor for employers 
under section 4980H using Form W-2 wages); (3) Notice 2012-17 (2012-9 
IRB 430) (provided that the look-back measurement method and the Form 
W-2 affordability safe harbor will be incorporated into upcoming 
proposed regulations and requested comments on a potential approach for 
determining the full-time employee status of new employees under 
section 4980H); and (4) Notice 2012-58 (2012-41 IRB 436) (provided 
guidance and reliance on approaches for ongoing employees and new 
employees who are reasonably expected to be full-time employees and 
requested comments on a revised optional method for determining the 
full-time employee status for new employees with variable hours and new 
seasonal employees). Public comments were submitted in response to each 
of the four notices.
    Taking into account all the comments received in response to this 
series of notices, on December 28, 2012, the Treasury Department and 
the IRS released a notice of proposed rulemaking (REG-138006-12, 78 FR 
218). Written and electronic comments responding to the notice of 
proposed rulemaking were received. The comments are available for 
public inspection at www.regulations.gov or upon request. A public 
hearing was conducted on April 23, 2013. After consideration of all of 
the comments and testimony, the proposed regulations are adopted as 
amended by this Treasury decision. The amendments are discussed in this 
preamble.
    After the issuance of the proposed regulations, on July 9, 2013, 
the Treasury Department and the IRS issued Notice 2013-45, which 
provides as transition relief that no assessable payments under section 
4980H will apply for 2014. Notice 2013-45 also provides transition 
relief for 2014 for the section 6056 information reporting requirements 
for applicable large employers and the section 6055 information 
reporting requirements for providers of MEC.
    The preamble to the proposed regulations provides transition relief 
that allows flexibility for individuals to make changes in salary 
reduction elections for accident and health plans provided through 
section 125 cafeteria plans for non-calendar cafeteria plan years 
beginning in 2013. The scope of this transition relief was clarified in 
section VI of Notice 2013-71 (2013-47 IRB 532), issued on October 31, 
2013.

II. Minimum Essential Coverage, Minimum Value and Affordability 
(Sections 5000A and 36B)

    MEC, MV and affordability are defined under Code provisions other 
than section 4980H, but all relate to the determination of liability 
under section 4980H, and accordingly are summarized briefly in this 
section of the preamble (but are more fully described in other cited 
guidance). Specifically, for purposes of section 4980H, an employer is 
not treated as having offered coverage to an employee unless the 
coverage is MEC. Moreover, under section 36B, an individual who is 
offered employer coverage but instead purchases coverage under a 
qualified health plan within the meaning of section 1301(a) of the 
Affordable Care Act on an Exchange may be eligible for a premium tax 
credit if the household income of the individual's family falls within 
certain thresholds and the coverage offered by the employer either does 
not provide MV or is not affordable. While an individual may purchase 
coverage under a qualified health plan on an Exchange without regard to 
whether the individual is eligible for a premium tax credit, an 
employer's potential liability under section 4980H is affected by the 
individual's purchase of coverage on an Exchange only if the individual 
receives a premium tax credit.

A. Minimum Essential Coverage (MEC)

    MEC is defined in section 5000A(f) and the regulations under that 
section. Section 5000A(f)(1)(B) provides that MEC includes coverage 
under an eligible employer-sponsored plan. Under section 5000A(f)(2) 
and Sec.  1.5000A-2(c)(1), an eligible employer-sponsored plan is, with 
respect to any employee, (1) group health insurance coverage offered 
by, or on behalf of, an employer to the employee that is either (a) a 
governmental plan within the meaning of section 2791(d)(8) of the 
Public Health Service Act (PHS Act) (42 U.S.C. 300gg-91(d)(8)), (b) any 
other plan or coverage offered in the small or large group market 
within a State, or (c) a grandfathered health plan, as defined in 
section 5000A(f)(1)(D), offered in a group market, or (2) a self-
insured group health plan under which coverage is offered by, or on 
behalf of, an employer to the employee. Section 5000A(f)(3) and 
regulations thereunder provide that MEC does not include coverage 
consisting solely of excepted benefits described in section 2791(c)(1), 
(c)(2), (c)(3), or (c)(4) of the PHS Act or regulations issued under 
these provisions. See Sec.  1.5000A-2(g).

B. Minimum Value (MV)

    If the coverage offered by an employer fails to provide MV, an 
employee may be eligible to receive coverage in a qualified health plan 
supported by the premium tax credit. Under section 36B(c)(2)(C)(ii), a 
plan fails to provide MV 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 provides that, in 
determining the percentage of the total allowed costs of benefits 
provided under a group health plan, the regulations promulgated by the 
Secretary of Health and Human Services (HHS) under section 1302(d)(2) 
of the Affordable Care Act apply. HHS published final regulations under 
section 1302(d)(2) of the Affordable Care Act on February 25, 2013 (78 
FR 12834). On May 3, 2013, the Treasury Department and the IRS 
published a notice of proposed rulemaking (REG-125398-12, 78 FR 25909) 
that adopts the HHS rules and provides additional guidance on MV. The 
HHS regulations at 45 CFR 156.20 define the percentage of the total 
allowed costs of benefits provided under a group health plan as (1) the 
anticipated covered medical spending for essential health benefits 
(EHB) coverage (as defined in 45 CFR 156.110(a)) paid by a health plan 
for a standard population, (2) computed in accordance with the plan's 
cost sharing, and (3) divided by the total anticipated allowed charges 
for EHB coverage provided to the standard population. In addition, 45 
CFR 156.145(c) provides that the standard population used to compute 
this percentage for MV (as developed by HHS for this purpose) reflects 
the population covered by typical self-insured group health plans. The 
HHS regulations describe several options for determining MV, including 
the MV Calculator (available at http://cciio.cms.gov/resources/regulations/index.html). Alternatively, a plan may determine MV through 
one of the safe harbors being established by HHS and the IRS. For plans 
with nonstandard features that are incompatible with the MV Calculator 
or a safe harbor, 45 CFR 156.145(a)(3) provides that the plan may 
determine MV through an actuarial certification from a member of the 
American Academy of Actuaries after the member performed an analysis in

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accordance with generally accepted actuarial principles and 
methodologies. Under proposed Sec.  1.36B-6(f)(4), an actuary 
performing an actuarial certification for a plan with nonstandard 
features must use the MV Calculator to determine the plan's MV for plan 
coverage the MV calculator measures. The actuary adds to that MV 
percentage the result of the actuary's analysis of nonstandard 
features. Finally, 45 CFR 156.145(a)(4) provides that a plan in the 
small group market satisfies MV if it meets the requirements for any of 
the levels of metal coverage defined at 45 CFR 156.140(b) (bronze, 
silver, gold, or platinum).

C. Affordability

    Under section 36B(c)(2)(B) and (C), an employee is not eligible for 
subsidized coverage for any month in which the employee is offered 
health coverage under an eligible employer-sponsored plan (as defined 
in section 5000A(f)(2)) that provides MV and that is affordable to the 
employee. Coverage for an employee under an eligible 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 taxpayer's household income for the taxable 
year. See section 36B(c)(2)(C)(i) and Sec.  1.36B-1(e).

III. Reporting Requirements for Applicable Large Employers (Section 
6056)

    Section 6056, enacted by the Affordable Care Act, directs an 
applicable large employer to file a return with the IRS that reports, 
for each employee who was a full-time employee for one or more months 
during the calendar year, certain information described in section 
6056(b) about the health care coverage the employer offered to that 
employee (or, if applicable, that the employer did not offer health 
care coverage to that employee). Section 6056 also requires applicable 
large employers to furnish, by January 31 of the calendar year 
following the calendar year for which the return must be filed, a 
related statement described in section 6056(c) to each full-time 
employee for whom information is required to be included on the return. 
On September 5, 2013, the Treasury Department and the IRS released a 
notice of proposed rulemaking (REG-136630-12, [78 FR 54996]) providing 
guidance under section 6056, including a description of and request for 
comments on certain simplified reporting methods under consideration by 
the Treasury Department and the IRS.

IV. The 90-Day Limit on Waiting Periods (Public Health Service Act 
Section 2708)

    Section 2708 of the PHS Act \4\ 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 may not apply 
any waiting period that exceeds 90 days. Section 2704(b)(4) of the PHS 
Act, section 701(b)(4) of ERISA, and 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. Section 2708 of the PHS Act does not 
require the employer to offer coverage to any particular employee or 
class of employees, but prevents an otherwise eligible employee (or 
dependent) from waiting more than 90 days before coverage becomes 
effective.
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    \4\ The Affordable Care Act adds section 9815(a)(1) to the Code 
and section 715(a)(1) to the Employee Retirement Income Security Act 
(ERISA) to incorporate the provisions of part A of title XXVII of 
the PHS Act into the Code and ERISA, and to make them applicable to 
group health plans and health insurance issuers providing health 
insurance coverage in connection with group health plans. The PHS 
Act sections incorporated by these references are sections 2701 
through 2728.
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    Notice 2012-59 (2012-41 IRB 443), and parallel guidance issued by 
the Department of Labor (DOL) and HHS,\5\ provide temporary guidance on 
compliance with section 2708 of the PHS Act and provide that this 
temporary guidance remains in effect at least through the end of 2014.
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    \5\ See Department of Labor Technical Release 2012-02 and HHS 
FAQs issued August 31, 2012.
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    On March 21, 2013, the Treasury Department, DOL, and HHS (the 
Departments) issued a notice of proposed rulemaking (REG-122706-12, 78 
FR 17313) providing guidance under section 2708 of the PHS Act. In the 
preamble to the proposed regulations under section 2708 of the PHS Act, 
the Departments state that, in their view, the proposed regulations are 
consistent with, and no more restrictive on employers than Notice 2012-
59 (and the parallel guidance issued by DOL and HHS) and further state 
that the Departments will consider compliance with the proposed 
regulations as compliance with section 2708 of the PHS Act at least 
through the end of 2014.
    Under the section 4980H final regulations, there are times when an 
employer will not be subject to an assessable payment with respect to 
an employee although the employer does not offer coverage to that 
employee during that time. However, the fact that an employer will not 
owe an assessable payment under section 4980H for failure to offer 
coverage during certain periods of time does not, by itself, constitute 
compliance with section 2708 of the PHS Act during that same period.\6\
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    \6\ The Departments expect to issue final regulations in the 
near future with respect to section 2708 of the PHS Act. As stated 
in the proposed rules, the Departments will consider compliance with 
the proposed regulations under section 2708 of the PHS Act as 
compliance with section 2708 of the PHS Act through at least 2014 
and, to the extent final regulations are more restrictive on plans 
and issuers, the final regulations will not be effective prior to 
January 1, 2015. 78 FR 17317 (March 21, 2013).
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Explanation and Summary of Comments

V. Determination of Status as an Applicable Large Employer

A. In General

    Section 4980H applies only to employers that are applicable large 
employers. Section 4980H(c)(2)(A) provides that 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 on business days 
during the preceding calendar year. Section 4980H(c)(2)(E) provides 
that solely for purposes of determining whether an employer is an 
applicable large employer, an employer shall, in addition to the number 
of full-time employees for any month otherwise determined, include for 
such month a number of employees determined by dividing the aggregate 
number of hours of service of employees who are not full-time employees 
for the month by 120. For purposes of the proposed regulations and 
these final regulations, these additions to the number of full-time 
employees made solely for the determination of status as an applicable 
large employer are referred to as full-time equivalent employees 
(FTEs).
    An applicable large employer may consist of multiple related 
entities (such as corporations) due to the application of the 
aggregation rules. Each such entity is referred to in this preamble and 
the final regulations as an applicable large employer member.
    Commenters requested that the threshold for status as an applicable 
large employer be increased to various numbers of full-time employees 
(including FTEs) greater than 50. The final regulations do not adopt 
this suggestion as a permanent rule because it is inconsistent with the 
statutory definition of applicable large employer

[[Page 8547]]

in section 4980H(c)(2). But see section XV.D.6 of this preamble for 
2015 transition relief for certain applicable large employers with 
fewer than 100 full-time employees (including FTEs). Additional 
comments received on the definition of applicable large employer and 
modifications to the rules related to the determination of status as an 
applicable large employer contained in the proposed regulations are 
described in this section V of the preamble.

B. Rules for Employers Not in Existence in Preceding Year

    Section 4980H(c)(2)(C)(ii) provides that in the case of an employer 
that was not in existence throughout the preceding calendar year, the 
determination of whether such employer is an applicable large employer 
for the current calendar year is based on the average number of 
employees that it is reasonably expected such employer will employ on 
business days in the current calendar year.
    The final regulations clarify that an employer is treated as not 
having been in existence throughout the prior calendar year only if the 
employer was not in existence on any business day in the prior calendar 
year. For example, if an employer comes into existence on May 1 of Year 
1, during Year 1 the employer's status as an applicable large employer 
is determined based on the average number of employees that it is 
reasonably expected such employer will employ on business days in the 
current calendar year (Year 1). To determine the employer's status as 
an applicable large employer for Year 2, the employer's status as an 
applicable large employer is determined based on the number of 
employees that it employed on business days from May 1 through December 
31 of Year 1 (rather than relying on the employer's reasonable 
expectations).
    Commenters requested that an employer not in existence in the prior 
calendar year be granted a safe harbor under which an employer would 
not be an applicable large employer until a certain period of time has 
passed after the employer begins operations or until a certain period 
of time has passed after a new employer employs at least a specified 
number of full-time employees. One commenter opposed the adoption of a 
safe harbor that would delay the applicable large employer 
determination for new employers. The final regulations do not adopt 
such a safe harbor.
    However, other aspects of section 4980H and the final regulations 
may address the concern raised by commenters that new employers will 
have difficulty establishing a group health plan in the first months of 
operation. In particular, under the final regulations, the 
determination of whether a new employer is an applicable large employer 
during its first calendar year is based on the employer's reasonable 
expectations at the time the business comes into existence, even if 
subsequent events cause the actual number of full-time employees 
(including FTEs) to exceed that reasonable expectation. Section 
54.4980H-2(b)(3). Also, for purposes of the liability calculation under 
section 4980H(a), with respect to a calendar month, the number of full-
time employees of an applicable large employer member is reduced by 
that member's allocable share of 30. Section 54.4980H-4(e). This 
reduction could be particularly significant for a new employer with a 
number of full-time employees that does not exceed 30 by a large number 
for certain calendar months (and that for some calendar months may be 
below 30), circumstances which the Treasury Department and the IRS 
anticipate would characterize many new employers. Also, under the look-
back measurement method if an employee is reasonably expected at his or 
her start date to be a full-time employee (and is not a seasonal 
employee) and is otherwise eligible for an offer of coverage, an 
employer that sponsors a group health plan that offers coverage to the 
employee by the first day of the calendar month immediately following 
the conclusion of the employee's initial three full calendar months of 
employment will not be subject to an assessable payment under section 
4980H(a) (and section 4980H(b) if the coverage offered provides MV) for 
those three calendar months by reason of its failure to offer coverage 
to the employee for the initial three full calendar months of 
employment. Section 54.4980H-3(d)(2)(iii). See also Sec.  54.4980H-
3(c)(2) for a similar rule under the monthly measurement method that 
applies based on when an employee first becomes otherwise eligible for 
an offer of coverage. An employer is also not subject to an assessable 
payment under section 4980H with respect to an employee for the first 
calendar month of the employee's employment if the employee's start 
date is other than the first day of the calendar month. See Sec.  
54.4980H-4(c) and Sec.  54.4980H-5(c).

C. Seasonal Workers

    Section 4980H(c)(2)(B) provides that an employer is not considered 
to employ more than 50 full-time employees if (1) the employer's 
workforce exceeds 50 full-time employees for 120 days or fewer during 
the calendar year, and (2) the employees in excess of 50 employed 
during such 120-day period are seasonal workers. For this purpose, the 
proposed regulations define the term 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. The proposed regulations further provide that 
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)).
    Commenters requested that other employees with seasonal employment 
who are not excluded under the seasonal worker exception nonetheless be 
excluded for purposes of determining applicable large employer status. 
However, given the specific statutory reference to seasonal workers as 
part of a more limited exception, there is no statutory authority for 
such a broad exclusion. Accordingly, the final regulations adopt the 
provisions of the proposed regulations with certain clarifications in 
response to comments.
    With respect to the reference to retail workers employed 
exclusively during the holiday seasons, commenters requested 
clarification of the specific events or periods of time that would be 
treated as holiday seasons. The final regulations do not indicate 
specific holidays or the length of any holiday season for this purpose, 
as these will differ for different employers. Retail workers employed 
exclusively during holiday seasons often are seasonal workers and 
therefore are generally excludible on that basis, if the employer 
otherwise meets the conditions of the seasonal worker exception.
    The proposed regulations apply the seasonal worker exception set 
forth in section 4980H(c)(2) based on the prior calendar year. One 
commenter requested that the seasonal worker exception apply to new 
employers. The final regulations adopt this suggestion, so that in the 
case of an employer that was not in existence on any business day 
during the preceding calendar year, the seasonal worker exception 
applies so that the employer will not be treated as an applicable large 
employer if it reasonably expects (1) its workforce to exceed 50 full-
time employees (including FTEs) for 120 days or fewer during the 
current calendar year, and (2)

[[Page 8548]]

the employees in excess of 50 employed during such 120-day period to be 
seasonal workers.

D. Application of Employer Aggregation Rules to Determination of Status 
as an Applicable Large Employer

    Section 4980H(c)(2)(C)(i) provides that, 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 one employer. Comments were received both in favor 
of and opposed to this aggregation rule; however, the rule is 
explicitly set forth in the statute and is thus retained. While the 
final regulations therefore incorporate this rule, they also provide, 
consistent with the proposed regulations, that the determination of any 
potential assessable payment under section 4980H(a) or (b) is made 
separately for each entity (referred to as an applicable large employer 
member) that together with other entities is treated as the applicable 
large employer. For a discussion of the determination of any potential 
liability under section 4980H, see section X of this preamble.
    The final regulations continue to reserve on the application of the 
employer aggregation rules under section 414(b), (c), (m) and (o) to 
government entities, as well as to churches or conventions or 
associations of churches (as defined in Sec.  1.170A-9(b)). Until 
further guidance is issued, those entities may apply a reasonable, good 
faith interpretation of section 414(b), (c), (m) and (o) in determining 
their status as an applicable large employer.

E. Predecessor Employers

    Section 4980H(c)(2)(C)(iii) provides that, for purposes of 
determining whether an employer is an applicable large employer, any 
reference to an employer includes a reference to any predecessor of the 
employer. As with the proposed regulations, the final regulations 
reserve with respect to specific rules for identifying a predecessor 
employer (or the corresponding successor employer). The Treasury 
Department and the IRS continue to consider development of rules for 
identifying a predecessor employer (or the corresponding successor 
employer), and 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 this purpose, use of the rules 
developed in the employment tax context for determining when wages paid 
by a predecessor employer may be considered as having been paid by the 
successor employer (see Sec.  31.3121(a)(1)-1(b)) is deemed reasonable.

F. Administrative Period

    As set forth in section XV.D.3 of this preamble, the Treasury 
Department and the IRS have concluded that transition relief for the 
2015 applicable large employer determination is appropriate because 
employers will be becoming familiar with the applicable large employer 
determination method and applying it for the first time with respect to 
2014 (to determine their status for 2015).
    In addition, commenters suggested that section 4980H should not 
apply to employers for a period of time after the end of the calendar 
year so that employers that are close to the 50 full-time employee 
(plus FTE) threshold, whose status may be affected by data from the 
final calendar months of the calendar year, have time to respond to 
becoming an applicable large employer. To address this concern, the 
final regulations provide, with respect to an employee who was not 
offered coverage at any point in the prior calendar year, that if the 
applicable large employer offers coverage on or before April 1 of the 
first year in which the employer is an applicable large employer, the 
employer will not be subject to an assessable payment (for January 
through March of the first year the employer is an applicable large 
employer) under section 4980H(a) by reason of its failure to offer 
coverage to the employee for January through March of that year, and 
the employer will not be subject to an assessable payment (for January 
through March of the first year the employer is an applicable large 
employer) under section 4980H(b) if the coverage offered provides MV. 
However, if the employer does not offer coverage to the employee by 
April 1, the employer may be subject to a section 4980H(a) assessable 
payment for those initial calendar months in addition to any subsequent 
calendar months for which coverage is not offered, and if the employer 
offers coverage by April 1 but the coverage does not provide MV, the 
employer may be subject to a section 4980H(b) assessable payment for 
those initial calendar months (in addition to any subsequent calendar 
months for which coverage does not provide MV or is not affordable). 
This rule applies only during the first year for which an employer is 
an applicable large employer (even if the employer falls below the 50 
full-time employee plus FTE threshold for a subsequent year and then 
expands and becomes an applicable large employer again).

G. Full-Time Equivalent Employees

    Full-time equivalent employees are included in the applicable large 
employer determination. See Sec.  54.4980H-2(c). A commenter suggested 
that the final regulations provide rounding rules for the monthly FTE 
calculation. 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. The proposed 
regulations and these final regulations provide that in determining the 
number of FTEs for each calendar month, fractions are taken into 
account. In response to a request for a rounding rule, the final 
regulations provide, as an option, that an employer may round the 
resulting monthly FTE calculation to the nearest one hundredth. For 
example, an employer with a calculation of 30.544 FTEs for a calendar 
month may round that number to 30.54 FTEs.

H. Application of Employment Break Period Rules and Special Unpaid 
Leave Rules to Determination of Applicable Large Employer Status

    The proposed regulations and these final regulations provide a 
method for determining full-time employee status, referred to as the 
look-back measurement method, under which employers may determine the 
status of an employee as a full-time employee during a subsequent 
period (referred to as the stability period), based upon the hours of 
service of the employee in a prior period (referred to as the 
measurement period). See Sec.  54.4980H-3(d). The proposed regulations 
and these final regulations also provide a method under which special 
unpaid leave and employment break periods during a measurement period 
are not treated as a period during which zero hours of service are 
credited when applying the look-back measurement method. See Sec.  
54.4980H-3(d)(6). Commenters suggested that these rules be extended to 
the applicable large employer determination calculation so that periods 
during which an employee experiences special unpaid leave or an 
employment break period would not be counted as periods of zero hours 
of service, as counting those periods in that manner brings down the 
average hours of service for the employee (which will reduce the full-
time

[[Page 8549]]

employee and FTE counts). Because the statute explicitly provides the 
method for determining applicable large employer status, including 
counting employees who do not average 30 hours of service per week, the 
final regulations do not adopt this suggestion.

VI. Hours of Service

    The identification of an employer's full-time employees and FTEs 
for purposes of determining its status as an applicable large employer, 
and of an employer's full-time employees for purposes of determining 
any potential liability under section 4980H, is based on each 
employee's hours of service. The following section discusses the rules 
for determining an employee's hours of service.
    The final regulations adopt the general definition of hours of 
service set forth in the proposed regulations. However, as discussed in 
sections VI.B and VI.C of this preamble, the final regulations include 
further rules to clarify or modify the application of the rules for 
crediting hours of service to address various situations raised in the 
comments.

A. General Definition of Hours of Service

    Section 4980H(c)(4)(B) provides that the Secretary of the Treasury, 
in consultation with the Secretary of Labor, will prescribe such 
regulations, rules and guidance as may be necessary to determine the 
hours of service of an employee, including rules for the application of 
section 4980H to employees who are not compensated on an hourly basis. 
In consultation with the Secretary of Labor, the Treasury Department 
and the IRS formulated rules set forth in the proposed regulations that 
generally were based on the definition of the term hour of service for 
purposes of the rules related to the crediting of hours of service 
under a qualified retirement plan (see 29 CFR 2530.200b-2(a)), with 
certain modifications.
    Specifically, the proposed regulations define an hour of service to 
mean 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 employees paid on an hourly basis, an employer is required to 
calculate actual hours of service from records of hours worked and 
hours for which payment is made or due. For employees paid on a non-
hourly basis (such as salaried employees), an employer may calculate 
the actual hours of service using the same method as for hourly 
employees, or use a days-worked equivalency crediting the employee 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, or a weeks-
worked equivalency whereby an employee would be 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. The proposed regulations 
prohibit use of these equivalencies, however, in circumstances in which 
their use would result in a substantial understatement of an employee's 
hours of service in a manner that would cause that employee not to be 
treated as a full-time employee.
    Comments were received on the days-worked and weeks-worked 
equivalency methods. Commenters requested that the number of hours of 
service credited under the equivalency methods be increased from eight 
hours per day or 40 hours per week to 10 hours per day or 45 hours per 
week, consistent with equivalency methods contained in regulations 
issued by DOL. See 29 CFR 2530.200b-3(e). The higher equivalency 
amounts under the DOL regulations are intended to provide an expansive 
standard for the number of hours an employee is credited with for 
purposes of eligibility, vesting and accrual of benefits in a pension 
plan. In the context of section 4980H, an equivalency of eight hours 
per day or 40 hours per week is more appropriate.
    Commenters requested clarification of the circumstances under which 
an employee must be credited with service under the equivalency 
methods. Specifically, commenters asked whether an employee must have 
actually worked one hour of service in a day or week to be credited 
with eight or 40 hours of service respectively for that period. The 
equivalency methods contained in the proposed regulations provide that 
hours must be credited for any day or week in which the employee would 
otherwise be required to be credited with one hour of service if 
treated as an hourly employee. As described previously in this section 
VI.A, under the service crediting method applicable to hourly 
employees, an hourly employee must be credited with hours of service 
for certain hours in which no services are performed but with respect 
to which payment is made or owed by the employer (such as certain hours 
of paid leave). Accordingly, the equivalency methods do not require 
that an employee have actually worked an hour of service in a day or 
week to be credited with eight or 40 hours of service with respect to 
that day or week. This approach is the same as the equivalency rule for 
crediting hours of service under an employee pension benefit plan under 
DOL regulations at 29 CFR 2530.200b-3(e).
    The preamble to the proposed regulations states that an employer 
may change the method of calculating non-hourly employees' hours of 
service for each calendar year. At one commenter's request, this rule 
has been added to the text of the final regulations. As set forth in 
the proposed and final regulations, an employer is not required to use 
the same method of calculating a non-hourly employee's hours of service 
for all non-hourly employees, and may apply different methods of 
calculating a non-hourly employee's hours of service for different 
categories of non-hourly employees, provided that the categories are 
reasonable and consistently applied. An employer may change the method 
of calculating a non-hourly employee's hours of service for one or more 
categories of non-hourly employees for each calendar year as well.
    One commenter asked whether an employer is required to calculate 
hours of service using all three hours of service calculation methods 
provided for non-hourly employees (actual hours and two equivalencies), 
and if an employer is required to classify the employee as a full-time 
employee if the employee would have such status under any of the 
methods. The regulations indicate that the equivalency methods are 
optional, and that an employer choosing to use equivalencies may 
determine hours of service using one of the equivalency methods. 
Accordingly, employers are not required to use more than one method of 
determining hours of service for any particular employee.
    Commenters requested that the equivalency methods be expanded to 
include employees who are compensated on an hourly basis. Because 
employers are required to maintain records of hours worked in the case 
of employees who are compensated on an hourly basis, and because use of 
the equivalency methods could in some cases understate or overstate the 
number of hours actually worked by such employees, the final 
regulations do not adopt this suggestion.
    One commenter requested that the anti-abuse rule prohibiting the 
use of an equivalency method if the result is to substantially 
understate an employee's hours of service in a manner that would cause 
the employee not to be treated as

[[Page 8550]]

a full-time employee be expanded to also prohibit the use of an 
equivalency method if the result is to understate hours of service for 
a substantial number of employees (even if no given employee's hours of 
service are understated substantially and even if the understatement 
would not cause the employee to not be treated as a full-time 
employee). This expanded rule could affect the calculation of FTEs as 
part of the applicable large employer determination. For example, if an 
employer had 100 non-hourly employees who each worked two days per week 
for 10 hours each day, the employer could not use the days-worked 
equivalency because that would result in 400 fewer hours of service 
being included in the FTE calculation for each week, even though the 
understatement would not affect the employees' treatment as full-time 
employees (because these employees are not full-time employees, 
regardless of the use of equivalencies). The final regulations adopt 
this suggestion.

B. Exclusions From Definition of Hour of Service

    Commenters requested that hours of service performed in certain 
capacities not be counted as an hour of service. The final regulations 
adopt the following changes in response to these comments.\7\
---------------------------------------------------------------------------

    \7\ Commenters also raised issues related to the application of 
the hour of service definition to certain categories of employees 
whose hours of service are particularly challenging to identify or 
track or for whom the final regulations' general rules for 
determining hours of service may present special difficulties. See 
section VI.C of this preamble.
---------------------------------------------------------------------------

1. Volunteer Employees
    Commenters requested that hours of service performed in the 
capacity of a volunteer for a government entity or tax-exempt 
organization not be counted as hours of service for purposes of section 
4980H. Under the definition of hour of service outlined in these 
regulations, an hour of service is generally defined as an hour for 
which an employee is paid or entitled to payment. Accordingly, hours 
worked by a volunteer who does not receive (and is not entitled to 
receive) compensation in exchange for the performance of services are 
not treated as hours of service for purposes of section 4980H.
    Commenters noted, however, that some volunteers receive 
compensation in the form of expense reimbursements, stipends, 
contributions to employee benefit plans, or nominal wages. Local 
governments, for instance, noted that many volunteer firefighters or 
other emergency responders are paid a salary or an hourly wage, 
generally at a rate lower than the rate paid to non-volunteers 
performing services in a similar capacity. Other volunteer firefighters 
or emergency responders may receive expense reimbursements or other 
fees each time they respond to a call. Commenters generally expressed 
concern that volunteer service would be discouraged if volunteer hours 
were required to be counted when determining whether the individual is 
a full-time employee for purposes of section 4980H.
    In response to these concerns, the final regulations provide that 
hours of service do not include hours worked as a ``bona fide 
volunteer.'' For this purpose, the definition of ``bona fide 
volunteer'' is generally based on the definition of that term for 
purposes of section 457(e)(11)(B)(i), which provides special rules for 
length of service awards offered to certain volunteer firefighters and 
emergency medical providers under a municipal deferred compensation 
plan. For purposes of section 4980H, however, bona fide volunteers are 
not limited to volunteer firefighters and emergency medical providers. 
Rather, bona fide volunteers include any volunteer who is an employee 
of a government entity or an organization described in section 501(c) 
that is exempt from taxation under section 501(a) whose only 
compensation from that entity or organization is in the form of (i) 
reimbursement for (or reasonable allowance for) reasonable expenses 
incurred in the performance of services by volunteers, or (ii) 
reasonable benefits (including length of service awards), and nominal 
fees, customarily paid by similar entities in connection with the 
performance of services by volunteers.
2. Student Employees
    Commenters from educational organizations requested that special 
rules apply for determining the hours of service of employees who are 
also students of an educational organization. These comments generally 
fell into two categories. First, commenters expressed concern about the 
impact of section 4980H on federal work study programs under which a 
student receives financial aid in the form of a federally subsidized 
work assignment. Commenters posited that if educational organizations 
were required to aggregate hours of service performed by the student 
employee in the context of the work study program with hours of service 
performed by the student employee for the educational organization in 
other capacities (for example, a non-work study position with the 
campus bookstore) in determining whether the student is a full-time 
employee for purposes of section 4980H, it could discourage educational 
organizations from hiring students in other capacities in addition to 
their work study positions. Second, commenters requested that hours of 
service performed for an outside employer by students through an 
internship or externship program sponsored by an educational 
organization not be counted as hours of service for the outside 
employer for section 4980H purposes. The commenters suggested that, 
without such an exception, outside employers would be discouraged from 
offering internships or externships to students, which could have a 
detrimental impact on the educational system.
    The federal work study program, as a federally subsidized financial 
aid program, is distinct from traditional employment in that its 
primary purpose is to advance education. See 34 CFR part 675. To avoid 
having the application of section 4980H interfere with the attainment 
of that goal, the final regulations provide that hours of service for 
section 4980H purposes do not include hours of service performed by 
students in positions subsidized through the federal work study program 
or a substantially similar program of a State or political subdivision 
thereof. However, the final regulations do not include a general 
exception for student employees. All hours of service for which a 
student employee of an educational organization (or of an outside 
employer) is paid or entitled to payment in a capacity other than 
through the federal work study program (or a State or local 
government's equivalent) are required to be counted as hours of service 
for section 4980H purposes.
    With respect to internships and externships, services by an intern 
or extern would not count as hours of service for section 4980H 
purposes under the general definition of hours of service contained in 
the regulations to the extent that the student does not receive, and is 
not entitled to, payment in connection with those hours. However, 
excluding hours of service for which interns or externs receive, or are 
entitled to receive, compensation from the employer from the definition 
of hours of service for section 4980H purposes would be subject to 
potential misuse through labeling positions as internships or 
externships to avoid application of section 4980H. The final 
regulations do not adopt a special rule for student employees working 
as

[[Page 8551]]

interns or externs for an outside employer, and, therefore, the general 
rules apply, including the option to use the look-back measurement 
method, as appropriate, or the monthly measurement method.
3. Members of Religious Orders
    A commenter requested clarification about whether members of 
religious orders must be treated as full-time employees of their orders 
for purposes of section 4980H. As noted in section VI.C of this 
preamble, the Treasury Department and the IRS continue to consider 
additional rules for the determination of hours of service for purposes 
of section 4980H with respect to certain categories of employees whose 
hours of service are particularly challenging to identify or track or 
for whom the final regulations' general rules for determining hours of 
service may present special difficulties, including hours worked by 
members of religious orders for the orders to which they belong. Until 
further guidance is issued, a religious order is permitted, for 
purposes of determining whether an employee is a full-time employee 
under section 4980H, to not count as an hour of service any work 
performed by an individual who is subject to a vow of poverty as a 
member of that order when the work is in the performance of tasks 
usually required (and to the extent usually required) of an active 
member of the order.

C. Application of Hours of Service to Certain Employees

    Commenters requested guidance on the application of the hours of 
service definition to certain categories of employees whose hours of 
service are particularly challenging to identify or track or for whom 
the final regulations' general rules for determining hours of service 
may present special difficulties.
    The Treasury Department and the IRS continue to consider additional 
rules for the determination of hours of service for purposes of section 
4980H with respect to certain categories of employees (including 
adjunct faculty, commissioned salespeople, and airline employees), and 
certain categories of hours associated with work by employees 
(including layover hours (for example, for airline employees) and on-
call hours). The regulation authorizes the promulgation of such rules 
through additional guidance, published in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2)(ii)(b)).
    Until further guidance is issued, employers of adjunct faculty, 
employers of employees with layover hours, including the airline 
industry, and employers of employees with on-call hours, as described 
in sections VI.C.1 through VI.C.3 of this preamble, respectively, are 
required to use a reasonable method of crediting hours of service that 
is consistent with section 4980H. Further, employers of other employees 
whose hours of service are particularly challenging to identify or 
track or for whom the final regulations' general rules for determining 
hours of service may present special difficulties, such as commissioned 
salespeople, are required to use a reasonable method of crediting hours 
of service that is consistent with section 4980H.
    A method of crediting hours is not reasonable if it takes into 
account only a portion of an employee's hours of service with the 
effect of characterizing, as a non-full-time employee, an employee in a 
position that traditionally involves at least 30 hours of service per 
week. For example, it is not a reasonable method of crediting hours to 
fail to take into account travel time for a travelling salesperson 
compensated on a commission basis. Paragraphs C.1 through C.3 of this 
section VI of the preamble describe methods of crediting hours of 
service that are (or are not) reasonable to use with respect to adjunct 
faculty, layover hours, including for airline industry employees, and 
on-call hours. The examples of reasonable methods provided are not 
intended to constitute the only reasonable methods of crediting hours 
of service. Whether another method of crediting hours of service in 
these situations is reasonable is based on the relevant facts and 
circumstances.
1. Adjunct Faculty
    Commenters raised issues relating to adjunct faculty who receive 
compensation for teaching a certain number of classes (or credits) and 
whose compensation is not based on the actual time spent on non-
classroom activities such as class preparation, grading papers and 
exams, and counseling students. Comments from employers generally 
suggested that the hours of service equivalencies for non-hourly 
employees (eight hours per day or 40 hours per week) were too high for 
this purpose, but that counting actual hours would be administratively 
burdensome. These commenters suggested various methods for permitting 
assumptions for hours of service that would be applied for each task 
completed, for example, a set number of hours of service per week per 
class or credit taught by an adjunct faculty member. Comments from 
employees and their representatives included two very different types 
of suggestions. Some suggested that any assumption be set sufficiently 
high and be subject to robust periodic review so as not to fail to 
attribute adequate hours of service for the work performed. Others 
suggested that the assumption be set at a relatively moderate level 
that would avoid giving undue incentives for institutions to reduce 
adjunct faculty members' teaching assignments to avoid full-time 
employee status.
    In addition, comments from adjunct faculty members and educational 
organizations requested the adoption of a method whereby an adjunct 
faculty member would be treated as a full-time employee for purposes of 
section 4980H only if the faculty member were assigned a course load 
that was equivalent to (or, as requested in some comments, at least 75 
percent of) the average course load assigned to faculty members who are 
treated as full-time employees by the particular educational 
organization or academic department. The course loads assigned to other 
faculty members may be a relevant factor in an employer's determination 
of the number of hours of service to be credited to an adjunct faculty 
member. However, the course loads of faculty treated as full-time 
employees may vary considerably, making implementation of the proposed 
approach very difficult to administer.
    Until further guidance is issued, employers of adjunct faculty (and 
of employees in other positions that raise analogous issues with 
respect to the crediting of hours of service) are required to use a 
reasonable method for crediting hours of service with respect to those 
employees that is consistent with section 4980H. With respect to 
adjunct faculty members of an educational organization who are 
compensated on the basis of the number of courses or credit hours 
assigned, the commenters noted that a wide variation of work patterns, 
duties, and circumstances apply in different institutions, academic 
disciplines, and departments, and apply to different courses and 
individuals, and that this might factor into the reasonableness of a 
particular method of crediting hours of service in particular 
circumstances.
    Various commenters also suggested, however, that, in the interest 
of predictability and ease of administration in crediting hours of 
service for purposes of section 4980H, regulations specify a multiple 
that might be applied to credit additional hours of service for each 
credit hour or hour of classroom time assigned to the adjunct faculty 
member. Commenters suggested a number of possible multiples that might 
be used for this purpose. After

[[Page 8552]]

reviewing these comments, the Treasury Department and the IRS have 
determined that, until further guidance is issued, one (but not the 
only) method that is reasonable for this purpose would credit an 
adjunct faculty member of an institution of higher education with (a) 
2\1/4\ hours of service (representing a combination of teaching or 
classroom time and time performing related tasks such as class 
preparation and grading of examinations or papers) per week for each 
hour of teaching or classroom time (in other words, in addition to 
crediting an hour of service for each hour teaching in the classroom, 
this method would credit an additional 1\1/4\ hours for activities such 
as class preparation and grading) and, separately, (b) an hour of 
service per week for each additional hour outside of the classroom the 
faculty member spends performing duties he or she is required to 
perform (such as required office hours or required attendance at 
faculty meetings).
    Although further guidance may be issued regarding these matters, 
the method described in the preceding paragraph may be relied upon at 
least through the end of 2015. To the extent any future guidance 
modifies an employer's ability to rely on that method, the period of 
reliance will not end earlier than January 1 of the calendar year 
beginning at least six months after the date of issuance of the 
guidance (but in no event earlier than January 1, 2016). This extended 
period of reliance is provided so that if the method described in the 
preceding paragraph is modified or replaced, employers will have 
sufficient time to make necessary adjustments. Of course, employers may 
credit more hours of service than would result under the method 
described in the preceding paragraph and also may offer coverage to 
additional employees beyond those identified as full-time employees 
under that method.
2. Layover Hours for Airline Industry Employees and Others
    Commenters noted that pilots and flight attendants often are 
required, as a practical matter, to remain overnight between flights at 
a location other than their residence. The Treasury Department and the 
IRS continue to consider additional rules for the determination of 
hours of service, including layover hours, for purposes of section 
4980H with respect to certain categories of employees whose hours of 
service are particularly challenging to identify or track or for whom 
the final regulations' general rules for determining hours of service 
may present special difficulties. Until further guidance is issued, 
with respect to categories of employees whose hours of service are 
particularly challenging to identify or track or for whom the final 
regulations' general rules for determining hours of service may present 
special difficulties, employers are required to use a reasonable method 
for crediting hours of service that is consistent with section 4980H.
    With respect to layover hours, it is not reasonable for an employer 
to not credit a layover hour as an hour of service if the employee 
receives compensation for the layover hour beyond any compensation that 
the employee would have received without regard to the layover hour or 
if the layover hour is counted by the employer towards the required 
hours of service for the employee to earn his or her regular 
compensation. For example, if an employer requires that an employee 
perform services for 40 hours per week to earn full salary, and credits 
``layover hours'' towards the 40 hours, then it would not be reasonable 
for the employer to fail to credit the layover hours as hours of 
service.
    For layover hours for which an employee does not receive additional 
compensation and that are not counted by the employer towards required 
hours of service, it would be reasonable for an employer to credit an 
employee in the airline industry with 8 hours of service for each day 
on which an employee is required, as a practical matter, to stay away 
from home overnight for business purposes (that is, 8 hours each day 
(or 16 hours total) for the two days encompassing the overnight stay). 
The employee must be credited with the employee's actual hours of 
service for a day if crediting 8 hours of service substantially 
understates the employee's actual hours of service for the day 
(including layover hours for which an employee receives compensation or 
that are counted by the employer towards required hours of service). 
Other methods of counting hours of service may also be reasonable, 
depending on the relevant facts and circumstances.
3. On-Call Hours
    Commenters requested that ``on-call'' hours, for which an employee 
has been directed by the employer to remain available to work, not be 
treated as hours of service unless the employee is directed to perform 
services. The commenters noted that a variety of compensation 
structures may apply to on-call hours. In some cases, employees are 
paid a reduced hourly wage for on-call hours. In other cases, employees 
are not paid additional compensation for on-call hours but are required 
to remain on call periodically as a condition of employment.
    The Treasury Department and the IRS continue to consider additional 
rules for determining hours of service for purposes of section 4980H 
with respect to certain work arrangements, including on-call hours, or 
categories of employees whose hours of service are particularly 
challenging to identify or track or for whom the final regulations' 
general rules for determining hours of service may present special 
difficulties. Until further guidance is issued, employers of employees 
who have on-call hours are required to use a reasonable method for 
crediting hours of service that is consistent with section 4980H. It is 
not reasonable for an employer to fail to credit an employee with an 
hour of service for any on-call hour for which payment is made or due 
by the employer, for which the employee is required to remain on-call 
on the employer's premises, or for which the employee's activities 
while remaining on-call are subject to substantial restrictions that 
prevent the employee from using the time effectively for the employee's 
own purposes.

VII. Identification of Full-Time Employees

A. In General

    Section 4980H(c)(4) defines the term full-time employee to mean, 
with respect to any month, an employee who is employed on average at 
least 30 hours of service per week. The final regulations provide two 
methods for determining full-time employee status--the monthly 
measurement method (described in section VII.B of this preamble) and 
the look-back measurement method (described in section VII.C of this 
preamble).
    The final regulations reiterate that the requirements for use of 
the look-back measurement method and the monthly measurement method 
prescribe minimum standards for the identification of full-time 
employees. Employers may always treat additional employees as eligible 
for coverage, or otherwise offer coverage more expansively than would 
be required to avoid an assessable payment under section 4980H, subject 
to compliance with any nondiscrimination or other applicable 
requirements.
1. Thirty-Hour Threshold
    Commenters requested that the 30 hours of service per week 
threshold be increased as part of the final regulations, either 
generally or as applied with

[[Page 8553]]

respect to certain positions or industries. Because the statute is 
explicit that the threshold for status as a full-time employee is an 
average of 30 hours of service per week, the final regulations do not 
adopt these suggestions.
    Other commenters pointed to employees whose hours of service are 
restricted by federal or other law, arguing that in such cases a lower 
threshold should be applied to determine whether the employee is a 
full-time employee. In particular, airline pilots explained that 
federal aviation law restricts the number of hours that a pilot may 
fly, resulting in many pilots averaging fewer than 30 hours of service 
per week despite having what may be considered a full-time position 
within the standards of the industry. However, section 4980H contains 
no exceptions from the requirement that an employee average at least 30 
hours of service per week to be a full-time employee. Accordingly, the 
30 hours of service threshold is not adjusted for any particular 
industry or position of employment in the final regulations. However, 
see the discussion of the application of hours of service to certain 
employees at section VI.C of this preamble.
2. Monthly Equivalency
    The proposed regulations provide that, for purposes of determining 
full-time employee status, 130 hours of service in a calendar month is 
treated as the monthly equivalent of at least 30 hours of service per 
week, provided that the employer applies this equivalency rule on a 
reasonable and consistent basis. This monthly standard takes into 
account that the average month consists of more than four weeks. 
Commenters suggested that the 130 hours of service monthly standard is 
not an appropriate proxy for 30 hours of service per week during 
certain shorter calendar months. However, the 130 hours of service 
monthly standard may also be lower than an average of 30 hours of 
service per week during other longer months of the calendar year (for 
example, the seven calendar months that consist of 31 days). Under the 
look-back measurement method in particular, 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).
    In developing the final regulations, the Treasury Department and 
the IRS considered whether the 130 hours of service monthly equivalency 
standard should apply to the monthly measurement method, described in 
section VII.B of this preamble, under which the determination of full-
time employee status is based on each calendar month. A standard was 
considered that would prorate any additional days beyond the minimum 28 
days in a calendar month, so that, for example, the months of January, 
March, May, July, August, October, and December would be treated as 
requiring 133 hours of service for full-time employee status (equal to 
4 3/7 weeks multiplied by 30 hours of service per week). However, that 
standard would result in no less than three different monthly 
equivalencies (one for February, one for the four calendar months with 
30 days, and one for the seven calendar months with 31 days). In 
addition, a calendar month may start on any day of the week, and there 
is no standard workweek for all employees so that some employees may, 
for example, perform services on weekends or for longer or varying 
shifts rather than set hours Monday through Friday. For these reasons, 
different standards for each calendar month would not only be an 
additional burden for employers, but also do little to address the 
variation in treatment that may occur, for example, between an employee 
generally performing hours of service on the weekend and an employee 
performing services on business days, solely due to the day of the week 
upon which a calendar month begins. Accordingly, the final regulations 
adopt a standard of 130 hours of service per calendar month for 
determining whether an employee is a full-time employee under both the 
look-back measurement method and the monthly measurement method. The 
130 hours of service standard is equal to 30 hours of service per week 
multiplied by 52 weeks and divided by 12 calendar months.
3. Aggregation of Hours of Service Across Applicable Large Employer 
Members
    The proposed regulations provide that, for purposes of identifying 
a full-time employee, hours of service must be counted across all 
applicable large employer members. For example, an employee who for a 
calendar month averaged 25 hours of service per week at one applicable 
large employer member and 15 hours of service per week at another 
applicable large employer member of the same applicable large employer 
would be a full-time employee for that calendar month.
    Commenters requested that an employee's status as a full-time 
employee be determined separately for each applicable large employer 
member based upon the employee's hours of service at each particular 
applicable large employer member. The final regulations do not adopt 
such a rule because it would often produce inequitable results by 
classifying an employee performing at least 30 hours of service per 
week for closely related applicable large employer members (for 
example, two corporations that are wholly-owned by another entity or 
individual) as not a full-time employee while classifying other 
employees working the same number of hours of service for one of those 
entities as full-time employees. For a discussion of how any assessable 
payment under section 4980H for a calendar month would be allocated 
among applicable large employer members if a full-time employee 
performed services for two or more applicable large employer members 
during the same calendar month, see section X of this preamble. For a 
discussion of how one applicable large employer member's offer of 
coverage applies to other applicable large employer members in the same 
applicable large employer, see section IX of this preamble.

B. Monthly Measurement Method

    Commenters requested further information about the identification 
of full-time employees by employers electing not to use the look-back 
measurement method. Pursuant to the statute, these full-time employees 
would be identified based on the hours of service for each calendar 
month; accordingly, these regulations refer to this method of 
identifying full-time employees as the monthly measurement method.
    Under the look-back measurement method set forth in the proposed 
regulations, if an employee is reasonably expected at his or her start 
date to be a full-time 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 three full calendar months of employment. See section 
VII.D of this preamble for a discussion of clarifications made to this 
rule in the final regulations. In developing the final regulations, the 
Treasury Department and the IRS considered whether a similar rule 
should be provided under the monthly measurement method.

[[Page 8554]]

    Under the monthly measurement method in the final regulations, an 
employer will not be subject to an assessable payment under section 
4980H(a) with respect to an employee because of a failure to offer 
coverage to that employee before the end of the period of three full 
calendar months beginning with the first full calendar month in which 
the employee is otherwise eligible for an offer of coverage under a 
group health plan of the employer if the employee is offered coverage 
no later than the day after the end of that three-month period. If the 
coverage for which the employee is otherwise eligible provides MV, the 
employer also will not be subject to an assessable payment under 
section 4980H(b) during that three-month period. For this purpose, an 
employee is otherwise eligible for an offer of coverage in a month if 
the employee meets all conditions to be offered coverage under the plan 
other than the completion of a waiting period, within the meaning of 
Sec.  54.9801-2.\8\ This rule applies only once per period of 
employment of an employee and applies with respect to each of the three 
full calendar months for which the employee is otherwise eligible for 
an offer of coverage under a group health plan of the employer. 
Accordingly, the relief may be available even if the employee 
terminates before that date (and before coverage is offered).
---------------------------------------------------------------------------

    \8\ Section 54.9801-2 provides definitions for terms used in 
chapter 100 of the Code (sections 9801 through 9834). Currently the 
definition of the term waiting period at Sec.  54.9801-2 contains a 
cross reference to the definition of the term waiting period at 
Sec.  54.9801-3(a)(3)(iii). Proposed regulations published March 21, 
2013, 78 FR 17313, would amend that cross reference to refer to 
Sec.  54.9815-2708(b) and to remove the definition at Sec.  54.9801-
3(a)(3)(iii), and would add Sec.  54.9815-2708 which would include a 
definition of the term waiting period at Sec.  54.9815-2708(b). 
Thus, Sec.  54.9801-2 provides the relevant definition of the term 
waiting period, and will continue to provide the relevant definition 
if revised as proposed.
---------------------------------------------------------------------------

    To avoid inequitable application of the rule that applies to 
employees who are first otherwise eligible for an offer of coverage by 
characterizing former employees as rehired employees after a short 
period of absence, the final regulations clarify that under the monthly 
measurement method, an employee must be treated as a continuing 
employee, rather than a new hire, unless the employee has had a period 
of at least 13 weeks during which no hours of service were credited (26 
weeks for an employee of an employer that is an educational 
organization). At the employer's option, the employee may be treated as 
a new hire if the employee is not credited with any hours of service 
during a period that is both at least four consecutive weeks' duration 
and longer than the employee's immediately preceding period of 
employment. For a description of the rehire rules, see section VII.E of 
this preamble.
    In determining how an employer should treat periods during which an 
employee is not credited with hours of service, the final regulations 
clarify that under the monthly measurement method, the special unpaid 
leave and employment break period rules do not apply. That is because 
determinations under the monthly measurement method are based on hours 
of service during that particular calendar month and are not based on 
averaging over a prior measurement period. For a description of the 
special unpaid leave and employment break period rules see section 
VII.E.2 of this preamble.
    Commenters requested that the monthly measurement method be applied 
in a manner that approximated or otherwise took into account payroll 
periods. To provide additional flexibility and reduce administrative 
burden on employers, the final regulations allow an employer to 
determine an employee's full-time employee status for a calendar month 
under the monthly measurement method based on the hours of service over 
successive one-week periods. Under this optional method, referred to as 
the weekly rule, full-time employee status for certain calendar months 
is based on hours of service over four-week periods and for certain 
other calendar months on hours of service over five-week periods. In 
general, the period measured for the month must contain either the week 
that includes the first day of the month or the week that includes the 
last day of the month, but not both. For this purpose, week means any 
period of seven consecutive calendar days applied consistently by the 
applicable large employer member for each calendar month of the year. 
For calendar months calculated using four week periods, an employee 
with at least 120 hours of service is a full-time employee, and for 
calendar months calculated using five week periods, an employee with at 
least 150 hours of service is a full-time employee. However, for 
purposes of coordination with both the premium tax credit and the 
section 5000A individual shared responsibility provisions, which are 
applied on a calendar month basis, an applicable large employer member 
is only treated as having offered coverage under section 4980H for a 
calendar month if it offers coverage to a full-time employee for the 
entire calendar month, regardless of whether the employer uses the 
weekly rule.

C. Look-Back Measurement Method

1. In General
    The proposed regulations provide a method, referred to as the look-
back measurement method, under which employers may determine the status 
of an employee as a full-time employee during a future period (referred 
to as the stability period), based upon the hours of service of the 
employee in a prior period (referred to as the measurement period). The 
look-back measurement method for identifying full-time employees is 
available only for purposes of determining and computing liability 
under section 4980H and not for purposes of determining status as an 
applicable large employer.
    Under the look-back measurement method for ongoing employees, an 
applicable large employer member determines each ongoing employee's 
full-time employee status by looking back at a standard measurement 
period of at least three months but not more than 12 months, as 
determined by the employer. 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. If the 
applicable large employer member determines that an employee was 
employed on average at least 30 hours of service 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 the worker remains an 
employee.
    The proposed regulations also provide look-back measurement method 
rules for new employees, including rules for employees who are 
reasonably expected to be full-time employees at the start date, and 
those who are variable hour employees or seasonal employees. A variable 
hour employee or seasonal employee will have his or her status as a 
full-time employee determined after an initial measurement period. The 
proposed regulations then provide transition guidance under which a new 
employee transitions into having his or her status as a full-time 
employee determined under the look-back measurement method rules 
applicable to ongoing employees.
    Although some commenters suggested that the look-back measurement 
method

[[Page 8555]]

of identifying full-time employees be eliminated, other commenters 
requested that it be retained. The look-back measurement method is 
intended as a method of crediting employees with hours of service they 
earn (during a measurement period) while also providing employers 
predictability in being able to identify full-time employees before the 
beginning of a potential coverage period (during a stability period). 
After reviewing the comments, the Treasury Department and the IRS have 
concluded that this method provides a practical and fair method for 
determining average hours of service that will facilitate compliance 
with section 4980H. Accordingly, the final regulations continue to 
permit a look-back measurement method as an optional method for 
identifying full-time employees.
2. Reasonable Expectations With Respect to a New Employee
    Under both the proposed regulations and the final regulations, the 
application of the look-back measurement method to a new employee 
depends on the employer's reasonable expectations with respect to the 
status of the new employee at his or her start date. Under the final 
regulations, if a new employee who is reasonably expected to be a full-
time employee at his or her start date is offered coverage by the first 
day of the month immediately following the conclusion of the employee's 
initial three full calendar months of employment (and if the employee 
was otherwise eligible for an offer of coverage during those three 
months), the employer is not subject to a section 4980H assessable 
payment for those initial three full calendar months of employment (or 
for the period prior to the initial three full calendar months of 
employment), provided that to avoid liability under section 4980H(b) 
for the initial three full calendar months, the coverage offered after 
the initial three full calendar months of employment must provide MV. 
Otherwise, with respect to a new employee who is reasonably expected to 
be a full-time employee at his or her start date, the employer may be 
subject to a section 4980H assessable payment beginning with the first 
full calendar month in which an employee is a full-time employee.
    Commenters requested further guidance on the circumstances under 
which an employer may reasonably expect a new hire to be a full-time 
employee. In response to these comments, the final regulations provide 
that whether an employer's determination that a new hire is not a full-
time employee (or is a full-time employee) is reasonable is based on 
the facts and circumstances. Factors to consider include, but are not 
limited to, 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 documented (for example, through a contract or job 
description), as requiring hours of service that would average 30 (or 
more) hours of service per week or less than 30 hours of service per 
week.
    Commenters also requested that employers that are educational 
organizations be prohibited from taking potential employment break 
periods into account in determining their expectations of future hours 
of service. For a description of the employment break period rule, see 
section VII.E.2 of this preamble. The final regulations clarify that 
educational organization employers cannot take into account the 
potential for, or likelihood of, an employment break period in 
determining their expectations of future hours of service.
3. Administrative Period
    Under the proposed and final regulations, an applicable large 
employer member using the look-back measurement method may, at its 
option, elect to add an administrative period of no longer than 90 days 
between the measurement period and the stability period. Under the 
proposed regulations, the term administrative period is defined as 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. However, the proposed regulations also 
provide that the period between a variable hour or seasonal employee's 
start date and the beginning of the initial measurement period must be 
taken into account in determining the administrative period. The 
definition of administrative period in the final regulations is revised 
to reflect that it also includes periods before the initial measurement 
period. Thus, the combined length of the period before the start of the 
initial measurement period and the period beginning immediately after 
the end of the initial measurement period and ending immediately before 
the beginning of the associated stability period is subject to an 
overall limit of 90 days.
    Commenters requested that the maximum permissible administrative 
period be extended from 90 days to three full calendar months. The 
proposed regulations regarding the administrative period in these 
circumstances were intended to allow employers to structure their plans 
to coordinate with section 2708 of the PHS Act (relating to the 
application of the 90-day limitation on waiting periods) in all 
circumstances. For this reason, the final regulations do not adopt this 
suggestion.
4. Rules for Full-Time Employee's Stability Periods That Are Longer 
Than the Associated Measurement Periods
    In general, under the proposed regulations, the minimum length of a 
measurement period is three months but the minimum length of a 
stability period for an employee who is a full-time employee based on 
hours of service in a measurement period is six months. Commenters 
requested that a three-month stability period be permitted if the 
employer uses a three-month measurement period and the employee is 
determined to be a full-time employee during the measurement period. 
The Treasury Department and the IRS remain concerned that permitting 
stability periods as short as three months for employees who are full-
time employees based on hours of service in the measurement period 
could lead to employees moving in and out of employer coverage (and 
potentially Exchange coverage) multiple times during the year, which 
would be undesirable from both the employee's and employer's 
perspective, and could also create administrative challenges for the 
Exchanges. Accordingly, this suggestion is not adopted.
    Commenters also asked for clarification of the measurement period 
that may be used for the subsequent six-month stability period in cases 
in which a less-than-six month measurement period is used (such as a 
three-month measurement period) and the employee averages at least 30 
hours of service per week during the measurement period, so that a 
stability period of at least six months must be applied. The final 
regulations clarify that the stability period refers to the period 
immediately following the measurement period and any associated 
administrative period. Therefore, for employees who average at least 30 
hours of service per week during a measurement period, who thus must be 
treated as full-time employees during an associated six-month stability 
period, the next measurement period

[[Page 8556]]

begins at a date during the stability period that is the latest date 
that will not result in any period between the end of that stability 
period and the beginning of the next stability period associated with 
the next measurement period. For example, suppose an employer uses a 
three-month measurement period consisting of January through March of 
Year 1, followed by a one month administrative period consisting of 
April of Year 1. In this example, employees who average 30 hours of 
service per week during the measurement period consisting of January 
through March of Year 1 must be treated as full-time employees during a 
six-month stability period consisting of May through October of Year 1. 
Under the final regulations, the next measurement period would be July 
through September of Year 1, the associated administrative period would 
be October of Year 1, and the next associated stability period would 
begin immediately at the end of the administrative period. Thus, the 
stability period for employees determined to be full-time employees 
during the measurement period consisting of July through September of 
Year 1 would consist of November of Year 1 through April of Year 2 and 
there would be no period between the end of the first stability period 
(October 31 of Year 1) and the beginning of the next stability period 
(November 1 of Year 1). For ongoing employees that do not average at 
least 30 hours of service per week during a measurement period, the 
length of the stability period cannot exceed the length of the 
measurement period.
5. Employee Categories To Which Different Measurement and Stability 
Periods May Be Applied
    The proposed regulations permit an employer to use measurement 
periods and stability periods that differ either in length or in their 
starting and ending dates for different categories of employees 
specified in the regulations, provided that the employees within each 
category are treated consistently. The categories specified in the 
proposed regulations are salaried employees and hourly employees, 
employees whose primary places of employment are in different states, 
collectively bargained employees and non-collectively bargained 
employees, and each group of collectively bargained employees covered 
by a separate collective bargaining arrangement. Commenters requested 
that these categories be expanded to, for example, any category 
established in good faith and consistent with business practices, any 
category of hourly employees based on payroll classifications, any 
category of employees of employers in an industry that demonstrates 
higher turnover than other industries, and any category of employees 
with turnover that is higher than other categories. The final 
regulations do not adopt these requests because of the associated 
administrative difficulties.
    Notice 2012-58 had also included employees of different entities as 
a separate category of employees. The preamble to the proposed 
regulations provides that 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. However, comments to the proposed 
regulations requested that the final regulations confirm that different 
applicable large employer members may use different starting and ending 
dates and lengths of measurement and stability periods. In response, 
the final regulations include this confirmation as well as confirmation 
that different applicable large employer members may use different 
measurement methods (the look-back measurement method or the monthly 
measurement method).
6. Variable Hour Employees
    As described in the preamble to the proposed regulations, with 
respect to certain positions of employment, employers have indicated 
that they could not determine at the start date whether the employee 
would be a full-time employee because an employee's hours of service in 
that position may vary significantly. Particularly in the hospitality 
and retail industries, employers requested that they be permitted to 
determine full-time employee status for employees whose hours may vary 
significantly by first considering hours of service for a period of 
time after the start date. In response to these comments made to the 
notices published before the proposed regulations, the proposed 
regulations generally provide that with respect to these employees, 
referred to as variable hour employees, an employer could use an 
initial measurement period, in combination with any administrative 
period, that did not extend beyond the last day of the first calendar 
month beginning on or after the first anniversary of the employee's 
start date. The proposed regulations treat an employee as a variable 
hour 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 of service 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. See proposed Sec.  54.4980H-1(a)(43).
    Commenters, generally representing employee organizations, 
suggested that the treatment provided to variable hour employees be 
removed. In general, these commenters suggested that employers would 
categorize an excessive number of employees as variable hour employees 
in order to take advantage of the ability to avoid section 4980H 
liability while not offering coverage during the first year of 
employment. These final regulations retain the treatment of variable 
hour employees because with respect to certain positions of employment 
involving variable hours, it is not reasonable to require that an 
employer assume what those hours will be. In response to the comments, 
however, the final regulations explicitly set forth certain factors to 
take into account in determining whether the employer, at the 
employee's start date, could not determine whether the employee was 
reasonably expected to be employed on average at least 30 hours of 
service per week during the initial measurement period. These factors 
are described in section VII.C.2 of this preamble and are set forth at 
Sec.  54.4980H-1(a)(49).
7. Temporary Staffing Firms
    The preamble to the proposed regulations notes that the application 
of section 4980H may be particularly challenging for temporary staffing 
firms and requested comments on certain specific areas relevant to 
temporary staffing firms, including whether new employees of a 
temporary staffing firm should be deemed or presumed to be variable 
hour employees for purposes of the look-back measurement method as well 
as whether special rules should apply to temporary staffing firms for 
purposes of determining when an employee has separated from service and 
the application of the rehire rules when an employee returns after a 
break in service. See section VII.E of the preamble for a discussion of 
the rehire rules.

[[Page 8557]]

    Some commenters requested that new employees of a temporary 
staffing firm be deemed, or alternatively presumed, to be variable hour 
employees rather than full-time employees for purposes of the look-back 
measurement method. Other commenters opposed the use of any presumption 
that employees of temporary staffing firms are variable hour employees, 
arguing that some of these employees will work predictable schedules 
averaging at least 30 hours of service per week. Temporary staffing 
firms vary widely in the types of assignments they fill for their 
clients and in the anticipated assignments that a new employee will be 
offered. Accordingly, the final regulations do not adopt a generally 
applicable presumption.
    To accommodate these variations and provide additional guidance, 
the final regulations set forth additional factors relevant to the 
determination of whether a new employee of a temporary staffing firm 
intended to be placed on temporary assignments at client organizations 
is a variable hour employee. These factors generally relate to the 
typical experience of an employee in the position with the temporary 
staffing firm that hires the new employee (assuming the temporary 
staffing firm employer has no reason to anticipate that the new 
employee's experience will differ) and include whether employees in the 
same position with the temporary staffing firm retain as part of their 
continuing employment the right to reject temporary placements that the 
employer temporary staffing firm offers the employee, whether employees 
in the same position with the temporary staffing firm typically have 
periods during which no offer of temporary placement is made, whether 
employees in the same position with the temporary staffing firm 
typically are offered temporary placements for differing periods of 
time, and whether employees in the same position with the temporary 
staffing firm typically are offered temporary placements that do not 
extend beyond 13 weeks. As demonstrated in the modified and additional 
examples related to temporary staffing firms, no factor is 
determinative. In addition, the determination of whether an employee is 
a variable hour employee is made on the basis of the temporary staffing 
firm's reasonable expectations at the start date. An employee may 
accordingly be classified as a variable hour employee if this 
categorization was appropriate based on the employer's reasonable 
expectations at the start date, even if the employee in fact averages 
30 or more hours of service per week over the initial measurement 
period.
    Commenters suggested that the rehire rules should be adjusted for 
employees of temporary staffing firms by reducing the length of the 
break in service required before an employee can be treated as a new 
hire from 26 weeks to 4 weeks or some other duration. The final 
regulations do not adopt this suggestion in part because the adoption 
of such a rule may encourage employers to use temporary staffing firms 
to provide firm employees to perform certain services in order to 
attempt to improperly avoid offering coverage or incurring liability 
for assessable payments under section 4980H. For a discussion of the 
reduction of the break-in-service period under the rehire rules from 26 
weeks to 13 weeks for all employers that are not educational 
organizations see section VII.E of this preamble.
    Commenters requested additional guidance on when a temporary 
staffing firm may treat an employee who is not working on assignments 
as having separated from service with the firm. Separation from service 
is relevant in a number of contexts beyond section 4980H, such as 
eligibility to receive a distribution from a qualified plan (see, for 
example, section 401(k)(2)(B)(i)(l)) and the requirement to provide a 
notice of continuation coverage under COBRA (see section 4980B), and 
temporary staffing firm employers generally have developed various 
means of determining when an employee has separated from service with 
the firm for these purposes. Accordingly, until further guidance is 
issued, temporary staffing firms, like all employers generally, may 
determine when an employee has separated from service by considering 
all available facts and circumstances and by using a reasonable method 
that is consistent with the employer's general practices for other 
purposes, such as the qualified plan rules, COBRA, and applicable State 
law. For a discussion of the rehire rules that apply under section 
4980H, see section VII.E of this preamble.
    Section II.D.3 of the preamble to the proposed regulations 
addresses two arrangements under which a client employer may use a 
temporary staffing firm to attempt to evade application of section 
4980H. In one arrangement, the client employer purports to employ an 
employee for only part of a week, such as 20 hours, and to hire that 
same individual through a temporary staffing firm for the remaining 
hours of the week, and then claim that the individual was not a full-
time employee of either the client employer or the temporary staffing 
firm. In the other arrangement, one temporary staffing firm purports to 
supply a client an individual as a worker for only part of a week, such 
as 20 hours, while a second temporary staffing firm purports to supply 
the same client the same individual for the remainder of the week, and 
then claim that the individual was not a full-time employee of the 
client or either of the temporary staffing firms. For these reasons and 
the reasons set forth in section II.D.3 of the preamble to the proposed 
regulations, the Treasury Department and the IRS continue to be 
concerned about these arrangements and anticipate that future guidance 
of general applicability, published in the Internal Revenue Bulletin 
(see Sec.  601.601(d)(2)(ii)(b)), will address them.
8. Seasonal Employees
    Under the proposed and final regulations, the look-back measurement 
method, including the use of the initial measurement period for a newly 
hired employee, may be applied by an employer to its seasonal employees 
in the same manner in which the rules apply to variable hour employees. 
The proposed regulations do not provide a definition of the term 
seasonal employee but rather reserve on the issue. Section II.C.2.b of 
the preamble to the proposed regulations indicates that employers are 
permitted through 2014 to use a reasonable, good faith interpretation 
of the term seasonal employee for purposes of section 4980H. The 
preamble further states that the Treasury Department and the IRS 
contemplated that the final regulations would add to the definition of 
seasonal employee a specific time limit in the form of a defined 
period, citing the final sentence of Sec.  1.105-11(c)(2)(iii)(C) as an 
example that could be adapted for purposes of section 4980H. The 
Treasury Department and the IRS specifically requested comments on this 
approach.
    Commenters generally supported the proposed treatment of seasonal 
employees, but had varying notions of the appropriate time limit for a 
recurring period of service for a seasonal employee, ranging from 45 
days to ten months. Consistent with the proposed regulations, the final 
regulations continue to provide for seasonal employees to be treated 
under the same rules applicable to variable hour employees. For this 
purpose, the final regulations provide that a seasonal employee means 
an employee in a position for which the customary annual employment is 
six months or less. The reference to customary means

[[Page 8558]]

that by the nature of the position an employee in this position 
typically works for a period of six months or less, and that period 
should begin each calendar year in approximately the same part of the 
year, such as summer or winter. In certain unusual instances, the 
employee can still be considered a seasonal employee even if the 
seasonal employment is extended in a particular year beyond its 
customary duration (regardless of whether the customary duration is six 
months or is less than six months). For example, if ski instructors at 
a resort have a customary period of annual employment of six months, 
but are asked in a particular year to work an additional month because 
of an unusually long or heavy snow season, they would still be 
considered seasonal employees.
    An employee in a seasonal position might be promoted or transferred 
to a permanent position. For example, a ski instructor might be moved 
to the position of grounds manager, which is anticipated to work year 
round. Under the final regulations, in general, if a seasonal employee 
experiences a change in employment status 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 not have 
been a seasonal employee (and would have reasonably been expected to be 
employed on average at least 30 hours of service per week), the 
employer has until the first day of the fourth month following the 
change in employment status, or, if earlier, the first day of the first 
month following the end of the initial measurement period (plus any 
applicable administrative period) if the employee averaged 30 hours of 
service per week or more during the initial measurement period, to 
treat the employee as a full-time employee.
9. Modification of Measurement Periods or Stability Periods To 
Consolidate Coverage Entry Dates
    Commenters requested that the initial measurement period be 
modified to account for plan designs that consolidate employees into 
particular entry dates, such as the first day of a pay period, the 
first day of the month, etc. Specifically these commenters requested 
that the initial measurement period be permitted to begin on the 
employee's start date in a period, such as a calendar quarter, but end 
on a common date, such as 12 months after the beginning of the calendar 
quarter, and employers be allowed to couple this approach with a 
uniform stability period. This proposed structure would often result in 
a stability period significantly longer than the associated measurement 
period. In this example, all employees starting during the calendar 
quarter would have a 12 month stability period, whether they started in 
the first month of the quarter or the last month of the quarter. With 
respect to an employee who does not have sufficient hours of service to 
be classified as a full-time employee, the Treasury Department and the 
IRS have consistently stated that it is not appropriate to apply that 
status for a longer period than the measurement period. In addition, 
the proposed approach would add considerable complexity to the rules 
governing the look-back measurement method. However, consistent with 
the proposed regulations, the final regulations provide that the 
initial measurement period for a new variable hour employee or new 
seasonal employee may begin on the employee's start date or any date 
after that up to and including the first day of the first calendar 
month following the employee's start date (or, if later, as of the 
first day of the first payroll period beginning on or after the 
employee's start date). Effectively, this allows employers to group new 
hires into 12 groups throughout the year for purposes of determining 
the initial measurement period. For these reasons, the final 
regulations retain the rule in the proposed regulations and do not 
adopt the commenters' suggestion.
10. Change in Employment Status
    The proposed regulations for the look-back measurement method 
contain a change in employment status rule for a variable hour or 
seasonal employee who experiences a change in employment status during 
the initial measurement period such 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. With respect to such an employee, in general, the 
employer will not be subject to an assessable payment for such an 
employee until the first day of the fourth full calendar month 
following the change in employment status if the employer provides 
coverage at the end of that period (and to avoid liability under 
section 4980H(b) the coverage provides MV) or, if earlier and the 
employee is a full-time employee based on 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). Under the final 
regulations, this rule is revised to also apply to an employee who has 
a change in employment status from part-time employee to full-time 
employee during the initial measurement period. For a description of 
the requirement that the employee be otherwise eligible for an offer of 
coverage during the period described in this paragraph, see section 
VII.D of this preamble.
    Commenters to the proposed regulations requested additional rules 
for how the look-back measurement method applies when an employee 
experiences various changes in employment status. As described in this 
section VII.C.10 of the preamble, the final regulations revise the 
change in employment status rule that applies during the initial 
measurement period for new employees who experience a change in 
employment status resulting in full-time employee status. The final 
regulations also provide a special rule, discussed in section VII.G of 
this preamble, that applies when an employee experiences a change in 
employment status from full-time employee status to part-time employee 
status; the employer is allowed to apply the monthly measurement method 
to such an employee within three months of the change if the employee 
actually averages less than 30 hours of service per week for each of 
the three months following the change in employment status and if the 
employer has offered the employee continuous coverage that provides MV 
from at least the fourth month of the employee's employment. Otherwise, 
under the look-back measurement method, full-time employee status in a 
stability period is based on hours of service in the prior applicable 
measurement period, regardless of whether the employee experiences a 
change in employment status either during the measurement period or 
during the stability period. Under the look-back measurement method, 
each employee's hours of service are measured (not just variable hour 
employees and seasonal employees) during the measurement period. In 
general, under the look-back measurement method, if the change in 
employment status results in a change in hours of service, that change 
is captured in a subsequent stability period. For a description of the 
rules regarding the use of the look-back measurement method for only 
some of an employer's employees, see section VII.G of this preamble.
11. New Employees Who Are Neither Variable Hour Employees nor Seasonal 
Employees
    Under the proposed and final regulations, an ongoing employee is an

[[Page 8559]]

employee who has been employed by an applicable large employer member 
for at least one complete standard measurement period. The proposed 
regulations provide rules for application of the look-back measurement 
method to new employees who are variable hour employees and seasonal 
employees but the proposed rules do not fully explain how full-time 
employee status is determined for other new employees. The final 
regulations clarify how an applicable large employer member determines 
full-time employee status of its new employees who are not variable 
hour employees or seasonal employees, for the period before the rules 
for ongoing employees apply (that is, for the period before the 
employee has been employed for a complete standard measurement period).
    In general, before becoming an ongoing employee, full-time employee 
status for a new employee who is reasonably expected at the employee's 
start date to be a full-time employee (and who is not a seasonal 
employee) is based on that employee's hours of service each calendar 
month (but note that an employer will not be subject to a section 
4980H(a) assessable payment for the initial three full months of 
employment if the employee is otherwise eligible for an offer of 
coverage during those three months and is offered coverage by the first 
day following those three months (and the employer will not be subject 
to a section 4980H(b) assessable payment for those months if the 
coverage offered provides MV).
    A definition of part-time employee is added to the final 
regulations for a new employee who is reasonably expected at the 
employee's start date not to be a full-time employee (and who is not a 
variable hour employee or a seasonal employee). The same rules that 
apply to new variable hour employees and new seasonal employees apply 
to new part-time employees. In the normal case, an employer's 
categorization of a new employee as a part-time employee or variable 
hour employee does not affect the way the look-back measurement method 
applies (because the initial measurement period is available to both 
types of employees).
12. Clarifications Regarding the Initial Measurement Period
    The final regulations clarify that an applicable large employer 
member may apply the payroll period rule set forth in Sec.  54.4980H-
3(d)(1)(ii) for purposes of determining an initial measurement period, 
provided that an initial measurement period must begin on the start 
date or any date between the start date and the later of the first day 
of the first calendar month following the employee's start date and the 
first day of the first payroll period that starts after the employee's 
start date.
    The proposed regulations define the initial measurement period, in 
part, as a period of at least three consecutive calendar months but not 
more than 12 consecutive calendar months. The final regulations clarify 
that the initial measurement period need not be based on calendar 
months but instead may be based on months, defined as either a calendar 
month or as the period that begins on any date following the first day 
of the calendar month and that ends on the immediately preceding date 
in the immediately following calendar month (for example, from March 15 
to April 14). In contrast, a stability period must be based on calendar 
months. The final regulations, consistent with the proposed 
regulations, also allow an employer to base measurement periods on one 
week, two week, or semi-monthly payroll periods.
13. Periods of Time Between Stability Periods
    Commenters noted that, in certain circumstances, there may be a 
period of time between the stability period associated with the initial 
measurement period and the stability period associated with the first 
full standard measurement period during which a variable hour employee 
or seasonal employee has been employed. This generally may occur in 
cases in which a new employee begins providing services a short period 
after the beginning of the standard measurement period that would apply 
to the employee if the employee were an ongoing employee.
    For example, suppose an employer uses 12-month measurement and 
stability periods for both its new variable hour employees and its 
ongoing employees, with the standard measurement period for ongoing 
employees running from October 15 of one year to the following October 
14, the administrative period for ongoing employees running from 
October 15 through December 31 and with the calendar year as the 
stability period for ongoing employees. If a new variable hour 
employee, Employee A, is hired on October 25, 2015, and the employer 
chooses to begin the initial measurement period for new variable hour 
employees on the first day of the first calendar month beginning after 
the start date, the initial measurement period for Employee A will run 
from November 1, 2015, through October 31, 2016. If Employee A averages 
at least 30 hours of service per week during the initial measurement 
period, the employer must treat Employee A as a full-time employee for 
a period of at least 12 months beginning no later than December 1, 2016 
(the first day of the 14th calendar month after hire). If that period 
begins on December 1, 2016, the period for which Employee A must be 
treated as a full-time employee will end no earlier than November 30, 
2017.
    The first standard measurement period applicable to Employee A is 
the period from October 15, 2016, through October 14, 2017. If Employee 
A averages 30 hours of service per week during this standard 
measurement period, the employer must treat Employee A as a full-time 
employee for the stability period that is co-extensive with the 2018 
calendar year. However, this would leave a period of time between the 
end of the stability period associated with Employee A's initial 
measurement period (November 30, 2017) and the beginning of the 
stability period associated with the first standard measurement period 
applicable to Employee A (January 1, 2018).
    The final regulations clarify that in circumstances in which there 
is a period of time between the stability period associated with the 
initial measurement period and the stability period associated with the 
first full standard measurement period during which a new employee is 
employed, the treatment as a full-time employee or not full-time 
employee that applies during the stability period associated with the 
initial measurement period continues to apply until the beginning of 
the stability period associated with the first full standard 
measurement period during which the employee is employed. If the 
employee is being treated as a full-time employee during the initial 
stability period, that treatment must be extended until the first day 
of the stability period associated with the first full standard 
measurement period during which the employee is employed, and if the 
employee is being treated as not a full-time employee during the 
initial stability period, that treatment may be extended until the 
first day of the stability period associated with the first full 
standard measurement period during which the employee is employed. 
Thus, in the example in the preceding paragraphs, Employee A is a full-
time employee for the month of December 2017.
    Further, the final regulations also clarify that for a variable 
hour employee or seasonal employee who does not average at least 30 
hours of service per week during the initial measurement period, the 
maximum length for a

[[Page 8560]]

stability period associated with the initial measurement period is the 
end of the first full standard measurement period (plus any associated 
administrative period) during which the new employee was employed 
(rather than at the end of the standard measurement period (plus any 
associated administrative period) in which the initial measurement 
period ends), which was the rule contained in the proposed regulations.

D. Clarification of Periods During Which Section 4980H Liability Does 
Not Apply

    In various circumstances, the final regulations provide that an 
employer will not be subject to an assessable payment under section 
4980H for a certain period of time and the term limited non-assessment 
period for certain employees is added to the final regulations to 
describe these periods. In particular, the final regulations provide, 
consistent with the proposed regulations, that section 4980H liability 
does not apply with respect to an employee who is in the initial 
measurement period (or the associated administrative period), for a 
period of time after an employee experiences a change to full-time 
employee status during the initial measurement period, or with respect 
to a new employee who is reasonably expected to be a full-time employee 
and to whom coverage is offered on the first of the month following the 
employee's initial three full calendar months of employment. The final 
regulations add a rule under the monthly measurement method under which 
an employer will not be subject to a section 4980H assessable payment 
with respect to an employee for the first full calendar month in which 
an employee is first otherwise eligible for an offer of coverage and 
the immediately subsequent two calendar months. Further, the final 
regulations provide that with respect to an employee who was not 
offered coverage by the employer at any point during the prior calendar 
year, if an employee is offered coverage by an applicable large 
employer, for the first time, on or before April 1 of the first 
calendar year for which the employer is an applicable large employer, 
the employer will not be subject to an assessable payment under section 
4980H by reason of its failure to offer coverage to the employee for 
January through March of that year.
    The final regulations clarify that each of these rules is only 
available if the employee is offered coverage by the first day of the 
month following the end of the applicable period, and for an employer 
to not be subject to an assessable payment under section 4980H(b) the 
employer must offer coverage that provides MV at the end of the period.
    In addition, the final regulations clarify that these rules only 
apply with respect to a calendar month if during the calendar month 
during the relevant period the employee is otherwise eligible for an 
offer of coverage (except that this rule does not apply with respect to 
the rule regarding an employer that is an applicable large employer for 
the first time, as described in section V.F of this preamble). For 
purposes of these rules, an employee is otherwise eligible to be 
offered coverage under a group health plan for a calendar month if, 
pursuant to the terms of the plan as in effect for that calendar month, 
the employee meets all conditions to be offered coverage under the plan 
for that calendar month, other than the completion of a waiting period, 
within the meaning of Sec.  54.9801-2.
    The final regulations also clarify that an employer will not be 
subject to an assessable payment with respect to an employee for the 
first month of an employee's employment with the employer, if the 
employee's first day of employment is a day other than the first day of 
the calendar month.
    Note that the relief from the section 4980H assessable payment 
provided by the rules described in this section does not affect an 
employee's eligibility for a premium tax credit. For example, an 
employee or related individual is not eligible for 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 actually offered to the employee by the employer, 
including any measurement period or administrative period, even if the 
employer is not subject to an assessable payment under section 4980H 
for this period.

E. Rehire Rules and Break-in-Service Rules for Continuing Employees

1. Rehire Rules
    The proposed regulations provide that, solely for purposes of 
section 4980H, an employee who resumes providing service to 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.
    In addition, the proposed regulations permit an employer to apply a 
parity rule, under which an employee may be treated as rehired after a 
shorter period of at least four consecutive weeks during which no hours 
of service were credited if that period exceeded 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 example, if an employee started 
employment and worked for six weeks, then had a period of eight weeks 
during which no hours of service were credited, the employer could 
treat the employee as a rehired employee, subject to the rules for new 
employees under these regulations, if the employee resumed providing 
services after the eight-week break.
    Comments were received on these rehire rules. Several employers and 
employer groups commented that the rehire rules in general, and the 
rule of parity in particular, are difficult to implement because they 
require the employer to maintain records of service of former employees 
across the employer's controlled group (the group of applicable large 
employer members that together are treated as an applicable large 
employer). Commenters requested that employers be permitted to 
determine, using any reasonable good-faith method, whether an employee 
resuming services after a break in service constitutes a new employee 
or a continuing employee. Other commenters requested that the length of 
the break in service required before a returning employee may be 
treated as a new employee be reduced from 26 weeks to some shorter 
length, such as four or ten weeks.
    The Treasury Department and the IRS believe that it would be 
inequitable to employees who had become eligible for coverage prior to 
the break in service to be subjected to a new period of exclusion from 
the plan (which can be over a year for variable hour employees) based 
upon a brief break in service. The Treasury Department and the IRS also 
remain concerned that without an objective standard for determining 
when an employee who returns after a break in service may be treated as 
a new employee, there is a potential for an employer to attempt to 
evade the requirements of section 4980H through a pattern of 
terminating and rehiring employees and then treating the returning 
employees as new employees. However, the Treasury Department and the 
IRS agree with the commenters

[[Page 8561]]

suggesting that a break-in-service period shorter than 26 weeks would 
be sufficient to curtail the potential for abuse. Accordingly, the 
final regulations retain the rehire rules contained in the proposed 
regulations but reduce the length of the break in service required 
before a returning employee may be treated as a new employee from 26 
weeks to 13 weeks (except for educational organization employers as 
described in this section of the preamble). This break-in-service 
period applies for both the look-back measurement method and the 
monthly measurement method.
    To avoid the treatment of employees of educational organizations as 
new employees resuming services after a scheduled academic break, 
however, the final regulations provide that for employees of 
educational organizations, the 26-week break-in-service period under 
the rehire rules provided in the proposed regulations continues to 
apply.
    The final regulations also retain the rule of parity, which, as 
under the proposed regulations, is optional on the part of the employer 
and need not be used if the employer does not maintain sufficient 
records of the periods of service of former employees or prefers not to 
use it for other reasons.
2. Break-in-Service Rules for Continuing Employees (Special Unpaid 
Leave Rule and Employment Break Period Rule)
    For purposes of applying the look-back measurement method to a 
returning employee not treated as a new employee, the proposed 
regulations provide an averaging method for special unpaid leave that 
is applicable to all employers choosing to use the look-back 
measurement method. For this purpose special unpaid leave is unpaid 
leave subject to the Family and Medical Leave Act of 1993 (FMLA), 
Public Law 103-3, 29 U.S.C. 2601 et seq., or to the Uniformed Services 
Employment and Reemployment Rights Act of 1994 (USERRA), Public Law 
103-353, 38 U.S.C. 4301 et seq., or on account of jury duty. Comments 
were received on the averaging rules for special unpaid leave, and 
those comments generally favored the approach provided in the proposed 
regulations.
    The proposed regulations also provide an averaging method for 
employment break periods that is applicable to educational 
organizations that use the look-back measurement method. For this 
purpose, an employment break period is a period of at least four 
consecutive weeks (disregarding special unpaid leave), measured in 
weeks, during which an employee is not credited with hours of service.
    Under the proposed averaging method, in the case of an employee 
returning from absence who would be treated as a continuing employee 
(that is, an employee whose break in service was shorter than one 
resulting in treatment as a rehired employee), the employer would 
determine 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 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, the employer could treat the employee as credited with 
hours of service for any periods of special unpaid leave (and, in the 
case of 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 educational organization, 
an employment break period). The two alternative methods were intended 
to be different expressions of an equivalent calculation, therefore 
having the same results. In no case, however, would the employer be 
required to exclude (or credit) more than 501 hours of service during 
employment break periods in a calendar year (however no such limit 
applies for special unpaid leave).
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS specifically requested comments on whether the 
employment break period rules should be applied to all employers, 
including employers that were not educational organizations. With 
respect to the averaging rules for employment break periods, commenters 
differed in their responses to the proposed regulations. Some employers 
stated that the rules should be eliminated because they were 
complicated and required administrative recordkeeping that employers do 
not currently undertake. Some employers and employer groups also 
requested that the employment break period rules not be extended to 
employers that are not educational organizations. Other commenters 
requested clarification on whether the employment break period rules 
apply to employers that are not educational organizations but that 
provide services to educational organizations, such as school bus 
operators. In contrast, some employee organizations supported the 
employment break period rule, stating that it more accurately reflected 
positions intended to be full-time employee positions and assisted in 
curbing potential employer actions to prevent employees from attaining 
full-time employee status. However, some employers and employees also 
suggested that the employment break period rule would not result in an 
expansion of coverage to employees not currently offered coverage, but 
rather in limiting hours to ensure that those employees were not 
classified as full-time employees.
    The final regulations retain the averaging rules for special unpaid 
leave and employment break periods as provided in the proposed 
regulations (that is, for purposes of applying the look-back 
measurement method to an employee who is not treated as a new employee 
under the rehire rules described in section VII.E.1 of this preamble). 
The commenters did not identify a compelling reason to extend the 
employment break period rule to employers that are not educational 
organizations. However, the final regulations provide that with respect 
to the determination of full-time employee status, the Commissioner may 
prescribe additional guidance of general applicability, published in 
the Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b)), which 
may include extension of the employment break period to other 
industries. In addition, the reduction in the break-in-service period 
under the rehire rule from 26 to 13 weeks in the final regulations (for 
employers that are not educational organizations) shortens the periods 
for which an individual may be credited with no hours of service that 
can be included in a measurement period (thereby lowering the average 
hours of service per week), addressing in part the issue that the 
employment break period also is intended to address. The employment 
break period rule continues to apply only to educational organizations, 
and the break-in-service period for employees of educational 
organizations continues to be 26 weeks.
    Neither the special unpaid leave rule nor the employment break 
period rule apply under the monthly measurement method, regardless of 
whether the employer is an educational organization.

F. Short-Term and High-Turnover Employees

1. Short-Term Employees
    In the preamble to the proposed regulations, the Treasury 
Department and the IRS requested comments on the

[[Page 8562]]

treatment of short-term employees, meaning employees who are reasonably 
expected to average at least 30 hours of service per week and are hired 
into positions expected to continue for less than 12 months (but not 
including seasonal employees, who are employees in positions that also 
last a certain limited period but are expected to recur on an annual 
basis). A short-term employee with a tenure of under three months 
generally should not raise issues under section 4980H as the employer 
generally would not be subject to liability under section 4980H with 
respect to those employees provided the employer sponsors a group 
health plan for which the employee would have been eligible had the 
employee continued working beyond the three months. The Treasury 
Department and the IRS continue to be concerned about the potential for 
abuse of any exception for short-term employees through the use of 
initial training period positions or other methods intended to 
artificially divide the tenure of an employee into one or more short-
term employment positions in order to avoid application of section 
4980H. For these reasons, the final regulations do not adopt any 
special provisions applicable to short-term employees.
2. Employees in High-Turnover Positions
    In the proposed regulations, the Treasury Department and the IRS 
requested comments on the treatment of employees in high-turnover 
positions, meaning positions in which a significant percentage of 
employees can be expected to terminate employment over a reasonably 
short period of time (for example, over a six-month period). Two 
categories of potentially high-turnover employees are already addressed 
in the final regulations. First, failure to offer coverage to full-time 
employees who do not continue in employment through the first day of 
the fourth month following the start date generally will not result in 
a potential payment under section 4980H if coverage would have been 
offered no later than the first day of the fourth month of employment. 
See Sec.  54.4980H-3(c)(2) and Sec.  54.4980H-3(d)(2)(iii). Second, 
failure to offer coverage to employees that are variable hour employees 
generally will not result in a section 4980H assessable payment under 
the look-back measurement method until after the last day of the first 
calendar month beginning on or after the first anniversary of the 
employee's start date, though the likelihood of the employee failing to 
continue employment through the initial measurement period may not be 
taken into account in determining whether the employee is a variable 
hour employee. See Sec.  54.4980H-3(d)(3)(iii). This leaves at issue 
positions in which employees are reasonably expected to average 30 
hours of service or more per week, and in which a significant portion 
of new hires are expected to continue in employment beyond three months 
but not for a significant period beyond three months.
    As discussed in the preamble to the proposed regulations, the 
Treasury Department and the IRS have concerns about the formulation and 
application of a special rule in this area. Specifically, the 
discussion in section II.C.6 of the preamble to the proposed 
regulations noted that ``high-turnover'' is a category that would 
require a complex definition 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. Because many high-turnover positions may also be filled 
by variable hour employees for whom the rules governing variable hour 
employees would address the churning concerns, and because of the 
concerns regarding the complexity and potential manipulation of any 
special rules in this area, the final regulations do not adopt any 
special provisions addressing high-turnover positions.

G. Employers Using Different Methods of Identifying Full-Time Employees 
for Different Categories of Employees

    Commenters requested clarification as to whether an employer must 
use the look-back measurement method for all employees if it chooses to 
use it for some employees or if an employer may use the look-back 
measurement method for some employees and the monthly measurement 
method for other employees. Commenters requested that employers have 
the ability to use the look-back measurement method for employees with 
variable work schedules and the monthly measurement method for 
employees with more predictable work schedules. According to these 
commenters, an employer's use of the look-back measurement method for 
its employees with fixed-hour schedules will produce the result that 
the employer is required to treat an employee as a full-time employee 
for a stability period if the fixed-hour full-time employee changes to 
a fixed-hour non-full-time schedule. They noted that such an employee 
may have been hired as a full-time employee and may have been provided 
coverage upon hire (or within three months), unlike variable hour 
employees for whom the employer generally has until the end of the 
first calendar month after the first anniversary of the employee's 
start date to offer coverage.
    The final regulations clarify that with respect to each of the 
enumerated categories of employees for which an employer may use 
measurement and stability periods that differ either in length or in 
their starting and ending dates, the employer may apply either the 
look-back measurement method or the monthly measurement method. See 
section VII.C.5 of this preamble regarding the permissible employee 
category rule. The final regulations neither expand the number of 
categories of employees nor permit employers to develop their own 
customized categories. In particular, the final regulations do not 
permit an employer to adopt the look-back measurement method for 
variable hour and seasonal employees while using the monthly 
measurement method for employees with more predictable hours of 
service. Under the look-back measurement method, the identification of 
a variable hour employee at the start date is based upon the employer's 
reasonable expectations. If classified as a variable hour employee, the 
employer is permitted to wait through the initial measurement period to 
determine whether the employee is a full-time employee; however, for 
every subsequent year of that employee's employment the identification 
of whether the employee is a full-time employee is based upon the 
employee's hours of service in the prior measurement period, without 
any application of the employer's reasonable expectations. If employers 
were permitted to subdivide the permitted categories between variable 
hour employees and non-variable hour employees (for example, applying 
the look-back measurement method to variable hour salaried employees 
and the monthly measurement method to non-variable hour salaried 
employees), the employer would be required to apply its reasonable 
expectations at the beginning of every measurement period to determine 
whether a salaried employee was a variable hour employee. While the 
treatment of a new hire who does not have previous hours of service is 
necessary to address how to determine whether a new variable hour 
employee is a full-time employee, the Treasury Department and the IRS 
have determined that permitting employees

[[Page 8563]]

in the same objective category to move between measurement methods 
based solely on the employer's reasonable expectations brings an 
excessive level of subjectivity into the determination of an employee's 
classification as a full-time employee that is not warranted by any 
lack of information.
    The final regulations also provide rules addressing an employee who 
experiences a change in employment status from a position for which the 
look-back measurement method is used to a position for which the 
monthly measurement method is used (or vice versa). In general, these 
rules are intended to protect an employee's status as a full-time 
employee during the transition period. Accordingly, these rules require 
that an employee transferring from a position for which the employer is 
using the look-back measurement method to a position for which the 
employer is using the monthly measurement method and who at the date of 
transfer is in a stability period during which the employee is treated 
as a full-time employee must continue to be treated as a full-time 
employee during the remainder of the stability period. If the employee 
is in a stability period for which the employee is not treated as a 
full-time employee, the employer may continue to treat the employee as 
not a full-time employee during the remainder of the stability period. 
With respect to the stability period that immediately follows the 
stability period during which the employee transferred, the employee 
must be treated as a full-time employee for any calendar month during 
which the employee would be a full-time employee under either the 
previously applicable look-back measurement method (and thus not lose 
the hours of service accumulated during the measurement period during 
which the transfer occurs) or the applicable monthly measurement 
method. After that immediately following stability period, the employer 
may determine the employee's status solely through application of the 
monthly measurement method.
    For an employee transferring from a category of employment to which 
the monthly measurement method applies to a position to which the look-
back measurement method applies, the rules generally require that the 
employer recreate the stability periods that would apply based upon the 
employee's hours of service before the transfer. However, consistent 
with the previously described rules, for the stability period 
immediately subsequent to the transfer, the employee must be treated as 
a full-time employee for any calendar month that the employee would be 
a full-time employee under either the previously applicable monthly 
measurement method or the applicable look-back measurement method. The 
final regulations provide several examples to illustrate the 
application of these rules.
    In addition, the final regulations allow an employer, in certain 
limited circumstances, to begin applying the monthly measurement method 
to an employee to whom the look-back measurement method has been 
applied sooner than required under the standard rules governing changes 
in methods. This rule is intended to address the concern raised by 
commenters that employers that offer coverage to an employee 
continuously from within three months of an employee's start date 
should not be required to continue to treat that employee as a full-
time employee for many months after that employee experiences a change 
in employment status to a position in which the employee will average 
less than 30 hours of service per week. Examples include a circumstance 
in which an employee who has been a full-time employee for ten years, 
and who was offered coverage within three months of the start date, 
changes from a position of employment to another position requiring 
fewer hours of service either as part of a phased-retirement program or 
to care for a family member. The final regulations allow an applicable 
large employer member to begin to apply the monthly measurement method 
in lieu of the otherwise applicable stability period beginning on the 
first day of the fourth full calendar month following the change in 
employment status. This rule applies only with respect to an employee 
to whom the applicable large employer member offered MV coverage from 
at least the first day of the month following the employee's initial 
three full calendar months of employment through the month in which the 
change in employment status occurs, and this rule applies only if 
during each of the three full calendar months following the change in 
employment status the employee has on average less than 30 hours of 
service per week. Under this rule, an employer may apply the monthly 
measurement method to an employee even if the employer does not apply 
the monthly measurement method to employees in the same category (for 
example, an employer could apply the monthly measurement method to an 
hourly employee, even if the employer uses the look-back measurement 
method to determine full-time employee status of all other hourly 
employees). The employer may continue to apply the monthly measurement 
method through the end of the first full measurement period (and any 
associated administrative period) that would have applied had the 
employee remained under the applicable look-back measurement method.
    The Treasury Department and the IRS anticipate that the rules with 
respect to a transfer from a position to which one look-back 
measurement method applies to a position to which another look-back 
measurement method applies will require complex rules because the 
methods may differ not only in the length of the applicable measurement 
and stability periods, but also the starting dates of the measurement 
periods (for example, the use of a calendar year for one measurement 
period but a non-calendar year period for another measurement period). 
To provide for these rules in the most comprehensible format, as well 
as to ensure flexibility to address situations that arise that have not 
currently been contemplated, the final regulations provide that with 
respect to the determination of full-time employee status, the 
Commissioner may prescribe additional guidance of general 
applicability, published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b)).

VIII. Affordability and Affordability Safe Harbors

A. Affordability Safe Harbors

    Liability under section 4980H only arises if at least one full-time 
employee of the applicable large employer member receives a premium tax 
credit. Even if the applicable large employer member offers coverage to 
95 percent or more of its full-time employees (and their dependents), 
thereby avoiding liability under section 4980H(a), the applicable large 
employer member may be subject to an assessable payment under section 
4980H(b) if one or more full-time employees obtain a premium tax 
credit. See section X of this preamble for a description of rules 
regarding liability under section 4980H. For an employee who is offered 
coverage by an employer to be eligible to receive a premium tax credit 
if the employee enrolls in coverage on an Exchange, the coverage 
offered to the employee by the employer must either fail to provide MV, 
or fail to be affordable to that employee, or both. Affordability under 
section 36B is determined by reference to the taxpayer's household 
income. Because an employer generally will not know the

[[Page 8564]]

taxpayer employee's household income, the proposed regulations under 
section 4980H set forth three separate safe harbors under which an 
employer could determine affordability based on information that is 
readily available to the employer. These three safe harbors are (1) the 
Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) 
the federal poverty line safe harbor. If an employer meets the 
requirements of the safe harbor, the offer of coverage is deemed 
affordable for purposes of section 4980H(b) regardless of whether it is 
affordable to the employee under section 36B. Subject to the 
modifications described in this section, the final regulations adopt 
these affordability safe harbors.
    These safe harbors are all optional. An employer may choose to use 
one or more of these safe harbors for all of 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. In response to a 
comment, the final regulations clarify that reasonable categories 
generally include specified job categories, nature of compensation (for 
example, salaried or hourly), geographic location, and similar bona 
fide business criteria. However, an enumeration of employees by name 
would not be considered a reasonable category.

B. Form W-2 Wages Safe Harbor

    Under the Form W-2 wages safe harbor, the employer may calculate 
the affordability of the coverage based solely on the wages paid to the 
employee by that employer (and any other member of the same applicable 
large employer that also pays wages to that employee), as reported in 
Box 1 of the Form(s) W-2 (``Wage and Tax Statement''). Consistent with 
the proposed regulations, the final regulations provide rules for 
addressing partial years due to the employee beginning or ending 
employment in the middle of a calendar year. Commenters requested that 
reductions in Form W-2 wages due to salary reduction elections under a 
section 401(k) plan or a cafeteria plan under section 125 be 
disregarded for purposes of the safe harbor. To be consistent with 
section 36B, under which an employee's household income (and thus the 
affordability of an offer of coverage) is determined without adding 
back those reductions, this suggestion is not adopted in the final 
regulations under section 4980H.
    Commenters also requested that employers be permitted to use the 
wages from the prior year Form W-2 instead of the current year for 
purposes of determining affordability. The final regulations do not 
adopt this comment because it would create a greater disconnect between 
the premium tax credit and the section 4980H assessable payment. Also, 
use of prior year wages would not be available with respect to new 
employees who were not employed by the employer in the prior year. 
Finally, one commenter requested that employers be permitted to impute 
full Form W-2 wages during periods of unpaid leave for purposes of 
applying the safe harbor. The final regulations do not adopt this 
comment; however, instead of the Form W-2 wages safe harbor, employers 
can use the rate of pay or federal poverty line safe harbor, both of 
which use a calculation that is based on an assumed wage amount that is 
not affected by unpaid leave.

C. Rate of Pay Safe Harbor

    Under the rate of pay safe harbor in the final regulations, an 
applicable large employer member's offer of coverage to an hourly 
employee is treated as affordable for a calendar month if the 
employee's required contribution for the calendar month for the lowest 
cost self-only coverage that provides MV does not exceed 9.5 percent of 
an amount equal to 130 hours multiplied by the lower of the employee's 
hourly rate of pay as of the first day of the coverage period 
(generally the first day of the plan year) or the employee's lowest 
hourly rate of pay during the calendar month. Under the same safe 
harbor, an applicable large employer member's offer of coverage to a 
non-hourly employee is treated as affordable for a calendar month if 
the employee's required contribution for the calendar month for the 
lowest cost self-only coverage that provides MV does not exceed 9.5 
percent of the employee's monthly salary, as of the first day of the 
coverage period (instead of 130 multiplied by the hourly rate of pay); 
provided that if the monthly salary is reduced, including due to a 
reduction in work hours, the safe harbor is not available.
    The rate of pay safe harbor provides employers with a design-based 
method for satisfying affordability without having to analyze each 
employee's wages and hours. Under this safe harbor, for an hourly 
employee, the employer uses an assumed rate of 130 hours per calendar 
month multiplied by an hourly employee's rate of pay, regardless of 
whether the employee actually works more or less than 130 hours during 
a calendar month. The affordability calculation under the rate of pay 
safe harbor is not altered by a leave of absence or reduction in hours 
worked. Thus, for example, under the rate of pay safe harbor, if an 
hourly employee treated as a full-time employee earns $10 per hour in a 
calendar month (and earned at least $10 per hour as of the first day of 
the coverage period) but has one or more calendar months in which the 
employee has a significant amount of unpaid leave or otherwise reduced 
hours, the employer may still require an employee contribution of up to 
9.5 percent of $10 multiplied by 130 hours ($123.50).
    The final regulations, unlike the proposed regulations, permit an 
employer to use the rate of pay safe harbor even if an hourly 
employee's hourly rate of pay is reduced during the year. The proposed 
regulations provide that the rate of pay safe harbor cannot be used if 
the employer reduces an employee's hourly rate of pay during the year, 
because otherwise employers could set an artificially high rate of pay 
at the beginning of the coverage period resulting in an artificially 
high required employee contribution, and then the employer could reduce 
the employee's rate of pay for the remainder of the coverage period. 
One commenter noted that there are instances in which an employer 
adjusts an employee's rate of pay depending on, for example, whether 
minimum sales goals are satisfied. Commenters also noted that the rate 
of pay may be reduced for bona fide reasons, such as a transfer of 
position, and requested that the rate of pay safe harbor be available 
in this circumstance as long as the premium was reduced to reflect the 
reduction in the rate of pay.
    In response to these comments, the final regulations permit an 
employer to apply the rate of pay safe harbor to an hourly employee 
even if the employee's rate of pay is reduced during the year. In this 
situation, the rate of pay is applied separately to each calendar 
month, rather than to the entire year and the employee's required 
contribution may be treated as affordable if it is affordable based on 
the lowest rate of pay for the calendar month multiplied by 130 hours. 
The final regulations adopt these changes because they result in lower 
employee required contributions in situations in which an employee's 
hourly rate of pay is reduced during the year.
    Commenters noted that the rate of pay safe harbor cannot be used, 
as a practical matter, for tipped employees or for employees who are 
compensated solely on the basis of commissions. While this is correct, 
employers can use the two other affordability safe harbors, Form W-2 
wages and federal poverty line, for determining affordability for

[[Page 8565]]

employees whose compensation is not based on a rate of pay.

D. Federal Poverty Line Safe Harbor

    Under the federal poverty line safe harbor, an applicable large 
employer member's offer of coverage to an employee is treated as 
affordable if the employee's required contribution for the calendar 
month for the lowest cost self-only coverage that provides MV 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. This safe harbor is intended to provide employers a 
predetermined maximum amount of employee contribution that in all cases 
will result in the coverage being deemed affordable.
    The proposed regulations provide that, in the interest of 
administrative convenience, employers may 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. One commenter 
requested that employers be permitted to use the guidelines in effect 
six months prior to the beginning of the plan year, so as to provide 
employers with adequate time to establish premium amounts in advance of 
the plan's open enrollment period. The final regulations adopt this 
comment.

IX. Offers of Coverage

A. 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).
    For purposes of section 4980H(a), the proposed and final 
regulations provide that an applicable large employer member is 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 as 
applicable). 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. 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 few 
full-time employees (and their dependents) might exceed five percent of 
the applicable large employer member's full-time employees. Commenters 
requested that this margin be adjusted based on the size of the 
employer so that large employers are not allowed to exclude large 
numbers of employees. This comment is not adopted because use of a 
uniform percentage reduces complexity and is easier for employers to 
apply. See section XV.D.7 of this preamble for limited 2015 transition 
relief under section 4980H(a) for certain employers that offer coverage 
to at least 70 percent of their full-time employees (and their 
dependents), and see section XV.D.5 of this preamble for transition 
relief regarding offers of coverage to dependents.
    The final regulations do not apply any specific rules for 
demonstrating that an offer of coverage was made. The otherwise 
generally applicable substantiation and recordkeeping requirements in 
section 6001 apply, including Rev. Proc. 98-25 (1998-1 CB 689). In 
addition, the offer generally can be made electronically. See Sec.  
1.401(a)-21 for a safe harbor method for use of electronic media.
    Consistent with the proposed regulations, the final regulations 
provide that if an employee has not been offered an effective 
opportunity to accept or decline coverage, the employee will not be 
treated as having been offered the coverage for purposes of section 
4980H. In response to comments, the final regulations provide that an 
effective opportunity to decline is not required for an offer of 
coverage that provides MV and is offered either at no cost to the 
employee or at a cost, for any calendar month, of no more than 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.\9\ 
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 MV or that may not be affordable. See the 
section entitled ``Background'' of the preamble to the proposed 
regulations regarding minimum value of eligible employer-sponsored 
plans and other rules regarding the health insurance premium tax credit 
for a discussion of concerns raised by an arrangement under which 
employees are required, as a condition of employment or otherwise, to 
be enrolled in an employer-sponsored plan that does not provide MV or 
is unaffordable, at 78 FR 25909, 25910 (May 3, 2013).
---------------------------------------------------------------------------

    \9\ For an employee offered coverage for all 12 calendar months 
of the year, the total cost for the year will be no more than 9.5 
percent of the federal poverty line for a single individual. Thus, 
regardless of the size of the employee's household or the level of 
other income or loss of any member of the employee's household, 
either the employer's coverage will be affordable for purposes of 
the premium tax credit or the employee's household income will be 
less than 100 percent of the federal poverty line and the employee 
will not be eligible for a premium tax credit.
---------------------------------------------------------------------------

    The final regulations also provide guidance on an offer of coverage 
for an employee who is employed by more than one applicable large 
employer member for a calendar month. The final regulations provide 
that an offer of coverage by one applicable large employer member to an 
employee for a calendar month is treated as an offer of coverage by all 
applicable large employer members for that calendar month. Thus, if one 
applicable large employer member offers coverage to the employee for a 
calendar month, every other member of the same applicable large 
employer is considered to have made the same offer of coverage to that 
employee for purposes of determining the liability under section 4980H, 
if any, of each applicable large employer member. For example, in the 
case of a group of applicable large employer members operating a single 
plan intended to offer coverage to employees of all the applicable 
large employer members, any employee offered coverage under the plan 
would be treated as receiving an offer of that coverage from each 
applicable large employer member. For a discussion of how any 
assessable payment under section 4980H for a calendar month would be 
allocated among applicable large employer members if a full-time 
employee performs services for two or more applicable large employer 
members during the same calendar month, see section X of this preamble.
    Commenters requested that employers not be subject to an assessable 
payment for failure to offer coverage to full-time employees who have 
coverage from other sources, such as Medicare, Medicaid or a spouse's 
employer. The final regulations do not adopt this comment because it is 
not consistent with section 4980H and would require that the employer 
verify alternative coverage in a manner not contemplated by the statute 
(for example, obligating an employer to question its employees as to 
Medicaid eligibility or a spouse's eligibility for and purchase of 
employer-sponsored coverage). However, an employee who is eligible for 
Medicare or Medicaid is not eligible for a

[[Page 8566]]

premium tax credit, and in cases in which no full-time employee 
receives a premium tax credit (for example, because all of an 
employer's full-time employees are eligible for Medicare or Medicaid), 
the employer will not be subject to an assessable payment under section 
4980H.\10\ In addition, for an employer that satisfies the requirements 
to avoid a payment under section 4980H(a), the employer will not be 
subject to a payment under section 4980H(b) with respect to those 
employees (because they are not eligible for a premium tax credit).
---------------------------------------------------------------------------

    \10\ For rules on when an individual is treated as eligible for 
Medicare or Medicaid, see Sec.  1.36B-2(c).
---------------------------------------------------------------------------

    The final regulations clarify that an employee's election of 
coverage from a prior year that continues for every succeeding plan 
year unless the employee affirmatively elects to opt out of the plan 
constitutes an offer of coverage for purposes of section 4980H.
    Commenters expressed concern about potential liability under 
section 4980H in the case of an applicable large employer that cannot 
obtain or maintain coverage for its employees because the employer 
cannot satisfy a health insurance issuer's minimum participation 
requirements. In the large group market, a minimum participation 
requirement cannot be used to deny guaranteed issue. For small 
employers, such as relatively small applicable large employers, final 
regulations issued by HHS provide that an issuer must guarantee issue 
coverage to a small employer during an annual, month-long open 
enrollment period regardless of whether the small employer satisfies 
any minimum participation requirement. See 45 CFR 147.104(b)(1). HHS 
regulations generally define a small employer as one that has at least 
one, but not more than 100, employees. For plan years beginning before 
January 1, 2016, states may set the upper limit at 50 employees.
    Commenters requested that the final regulations treat an offer of 
coverage made by the employer during the collective bargaining process 
between an employer and a union that is not accepted by the union as an 
offer of coverage to all employees covered by the collective bargaining 
agreement. However, even where an offer to the union has been made and 
rejected, the affected employee has never been provided a chance to 
accept an offer of coverage in these circumstances. Accordingly, the 
final regulations do not adopt this suggestion.

B. Application to Multiemployer and Single Employer Taft-Hartley Plans, 
Multiple Employer Welfare Arrangements (MEWAs) and Other Similar 
Arrangements

    Commenters requested clarification of whether an offer of coverage 
under a multiemployer or single employer Taft-Hartley plan, if the 
employer contributed to the plan on behalf of the employee, constitutes 
an offer of coverage by the employer for purposes of section 4980H. The 
final regulations clarify that for purposes of section 4980H, an offer 
of coverage includes an offer of coverage made on behalf of an 
employer, and that this would include an offer made by a multiemployer 
or single employer Taft-Hartley plan or a MEWA to an employee on behalf 
of a contributing employer of that employee. See section XV.E of this 
preamble for interim guidance on the application of section 4980H to 
multiemployer plans.
    Under this same reasoning, if certain conditions are met, an offer 
of coverage to an employee performing services for an employer that is 
a client of a professional employer organization or other staffing firm 
(in the typical case in which the professional employer organization or 
staffing firm is not the common law employer of the individual) 
(referred to in this section IX.B of the preamble as a ``staffing 
firm'') made by the staffing firm on behalf of the client employer 
under a plan established or maintained by the staffing firm, is treated 
as an offer of coverage made by the client employer for purposes of 
section 4980H. For this purpose, an offer of coverage is treated as 
made on behalf of a client employer only if the fee the client employer 
would pay to the staffing firm for an employee enrolled in health 
coverage under the plan is higher than the fee the client employer 
would pay to the staffing firm for the same employee if the employee 
did not enroll in health coverage under the plan.

X. Assessment and Payment of Section 4980H Liability

    Under the proposed and final regulations, 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. 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. The 
IRS will adopt procedures that ensure employers receive certification, 
pursuant to regulations issued by HHS, that one or more employees have 
received a premium tax credit or cost-sharing reduction. 45 CFR 
155.310(i). The IRS will contact employers to inform them of their 
potential liability and provide them an opportunity to respond before 
any liability is assessed or notice and demand for payment is made. It 
is anticipated that additional guidance of general applicability, 
published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b)), will provide that the contact for a given 
calendar year will not occur until after employees' individual tax 
returns are due for that year claiming premium tax credits and after 
the due date for employers that meet the 50 full-time employee (plus 
FTE) threshold to file the information returns identifying their full-
time employees and describing the coverage that was offered (if any).
    Commenters requested that employers be permitted to aggregate 
applicable large employer members within an applicable large employer 
for purposes of determining section 4980H liability. For example, 
commenters requested that an applicable large employer member offering 
coverage to all of its full-time employees be permitted to aggregate 
with one or more applicable large employer members so that the 
aggregated group would be treated as having offered coverage to at 
least 95 percent of its full-time employees (and their dependents) to 
avoid a payment under section 4980H(a). Due to concerns regarding 
increased administrative complexity and potential for abuse, the final 
regulations do not adopt this request.
    With respect to a full-time employee who performs services for two 
or more applicable large employer members during the same calendar 
month, the final regulations provide that the member for whom the 
employee has the greatest number of hours of service for that calendar 
month is the member that treats that employee as a full-time employee 
for purposes of assessable payment determinations under section 
4980H(a) and (b). This rule modifies the rule in the proposed 
regulations, which provides an allocation rule only for purposes of the 
section 4980H(b) assessable payment liability and which allocated the 
payment amount 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 any calendar month in which the employee has 
the same number of hours of service for two or more applicable large

[[Page 8567]]

employer members, the final regulations provide that the members can 
treat one of the members for which the employee performs services as 
the employer of that employee for that calendar month for purposes of 
the assessable payment determination. The Treasury Department and the 
IRS anticipate that the member who is treated as the employer of that 
employee would report that employee as its full-time employee on the 
member's section 6056 information return, and if the employee is not 
included in any applicable large employer member's section 6056 
information return, the IRS will select a member to be treated as the 
employer of that employee for purposes of the assessable payment 
determination.
    In complying with section 4980H, applicable large employer members 
are responsible for ensuring 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)).
    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.

XI. Definition of Dependent

A. In General

    Section 4980H provides that in order to avoid a potential 
assessable payment under section 4980H, an applicable large employer 
must offer coverage to its full-time employees and the full-time 
employees' dependents. For this purpose, the proposed regulations 
define the term dependent to mean a child (as defined in section 
152(f)(1)) of an employee who has not attained age 26. For this 
purpose, a dependent does not include the spouse of an employee. This 
definition of dependent applies only for purposes of section 4980H. See 
section XV.D.5 of this preamble for transition relief regarding offers 
of coverage to dependents.
    Commenters requested that the definition of dependent be expanded 
to include grandchildren and qualifying relatives (within the meaning 
of section 152). The final regulations do not expand the definition of 
dependent to include these categories because such a definition would 
be inconsistent with the typical coverage provided by employer-
sponsored plans.
    Some commenters requested that the definition of dependent be 
expanded to include spouses, and other commenters supported the 
proposal to exclude spouses from the definition of dependent. The 
definition of dependent in the final regulations, consistent with the 
definition in the proposed regulations, excludes spouses.

B. Foster Children and Stepchildren

    By incorporating section 152(f)(1), the definition of dependent in 
the proposed regulations includes biological children, stepchildren, 
adopted children, and foster children. Commenters requested that foster 
children and stepchildren be removed from the definition of dependent 
for purposes of section 4980H. With respect to foster children, 
commenters noted that the government entities responsible for a foster 
system typically provide health benefits for the foster child, so that 
employer-provided coverage would be duplicative and difficult to 
administer. With respect to stepchildren, commenters noted that in the 
case of a stepchild, the child in most cases will have two parents who 
are not stepparents both of whom potentially would be able to provide 
for the child's coverage and both of whose employers potentially could 
be subject to section 4980H for failing to offer coverage to that 
child. These commenters suggested that applying section 4980H to an 
employee's stepchildren would in many cases be duplicative and that, 
for this reason, many employers currently do not extend offers of 
coverage to stepchildren of an employee. In light of these 
considerations, the final regulations exclude both foster children and 
stepchildren from the definition of dependent for purposes of section 
4980H only.

C. Treatment During Month in Which Dependent Attains Age 26

    A commenter requested clarification of the application of section 
4980H to an employee's child for the month in which the child attains 
age 26. In response, the final regulations clarify that for purposes of 
section 4980H, a child is a dependent for the entire calendar month 
during which he or she attains age 26.

D. Citizens or Nationals of Other Countries

    The definition of dependent under the proposed regulations includes 
children who are not citizens or residents of the United States. 
Section 152(b)(3), which is not incorporated in the definition of 
dependent under the proposed regulations, provides that the term 
dependent does not include an individual who is not a citizen or 
national of the United States unless such individual is a resident of 
the United States or a country contiguous to the United States (certain 
adopted children are excepted from this rule). Based on a commenter's 
concerns about offering coverage to the children of an employee who 
works for an applicable large employer in the United States but whose 
children are not U.S. citizens and who do not reside in the United 
States, the final regulations modify the definition of dependent to 
incorporate the rules under section 152(b)(3). Accordingly, the final 
regulations exclude a child who is not a U.S. citizen or national from 
the definition of dependent, unless that child is a resident of a 
country contiguous to the United States or is within the exception for 
adopted children described in section 152(b)(3)(B).

XII. Worker Classification and Section 4980H

    Consistent with the proposed regulations, these final regulations 
define an employee for purposes of section 4980H as an individual who 
is an employee under the common law standard, and as not including a 
leased employee (as defined in section 414(n)(2)), a sole proprietor, a 
partner in a partnership, a 2-percent S corporation shareholder, or a 
worker described in section 3508 (this last category is added to the 
list of exclusions in the final regulations). Commenters expressed 
concerns about the consequences under section 4980H of an IRS 
examination in which workers providing services to a service recipient 
entity are reclassified as employees of that entity. Specifically, 
commenters pointed out that if a worker who was not treated as an 
employee by the service recipient and was not offered health coverage 
by the service recipient is reclassified as an employee of the service 
recipient for past periods, and that worker had sufficient hours of 
service to be a full-time employee for such past periods, the 
reclassification may impact whether the service recipient employer had 
offered coverage to no less than 95 percent of its full-time employees 
for a particular calendar month (and therefore whether an assessable 
amount was payable under section 4980H(a)). In addition, one commenter 
noted that, even if the reclassification did not result in liability 
for an assessable payment under section 4980H(a), the service recipient 
could still be liable for an assessable payment under section 4980H(b) 
if the reclassified full-time employee had received a premium tax 
credit.
    Commenters discussed the applicability of section 530 of the 
Revenue Act of 1978 (referred to in this preamble as ``Section 530'') 
for purposes of section 4980H. Section 530, which is not incorporated 
into the Code, provides that ``if (A) for purposes of employment

[[Page 8568]]

taxes, the taxpayer did not treat an individual as an employee for any 
period, and (B) in the case of periods after December 31, 1978, all 
Federal tax returns (including information returns) required to be 
filed by the taxpayer with respect to such individual for such period 
are filed on a basis consistent with the taxpayer's treatment of such 
individual as not being an employee, then, for purposes of applying 
such taxes for such period with respect to the taxpayer, the individual 
shall be deemed not to be an employee unless the taxpayer had no 
reasonable basis for not treating such individual as an employee.'' 
However, the relief under Section 530 applies solely for purposes of 
the employment tax provisions of the Code, and therefore does not apply 
to potential liabilities under section 4980H.
    In response to the limitation on the relief under Section 530, 
commenters requested that the Treasury Department and the IRS formulate 
a similar provision in these final regulations applicable to potential 
liabilities under section 4980H. The Treasury Department and the IRS 
are concerned that the relief requested would serve to increase the 
potential for worker misclassification by significantly increasing the 
benefit of having an employee treated as an independent contractor. 
Accordingly, the final regulations do not adopt this suggestion.

XIII. Particular Positions of Employment

A. Home Care Workers

    Commenters on behalf of the home care industry, as well as other 
industries, stated that the additional expense of providing coverage or 
paying the assessable payment under section 4980H could cause an 
employer financial difficulties. The Treasury Department and the IRS 
understand that in certain instances the additional expense may be a 
burden for an employer; however, section 4980H applies to all 
applicable large employers and does not provide an exception, either 
for employers in a particular industry such as the home care industry, 
or for employers with more difficulty adjusting revenue streams. 
Accordingly, the final regulations do not provide for these types of 
exceptions.
    Section 4980H applies, however, only with respect to an applicable 
large employer, and in some circumstances the service recipient rather 
than a home care agency may be the common law employer of the health 
care provider. For example, if the service recipient has the right to 
direct and control the home care provider as to how they perform the 
services, including the ability to choose the home care provider, 
select the services to be performed, and set the hours of the home care 
provider, these facts would indicate that the service recipient is the 
employer under the common law standard. In that case, the agency that 
placed the home care provider would not be subject to section 4980H 
with respect to that particular provider, and the service recipient 
employer generally would not be subject to section 4980H with respect 
to any employee because the service recipient is unlikely to employ 50 
full-time employees (including FTEs).

B. Section 3508 Employees

    Commenters requested clarification on whether the categories of 
workers identified in section 3508 (that is, real estate agents and 
direct sellers) are treated as employees for purposes of section 4980H. 
Because section 3508 provides that the identified categories of workers 
are not treated as employees for any purpose of the Code, the final 
regulations clarify that workers identified in section 3508 do not 
constitute employees for purposes of section 4980H (and, therefore, do 
not constitute full-time employees for any purpose, and their hours of 
service are not taken into account in determining the number of an 
employer's FTEs).

XIV. International Issues

A. Foreign States and International Organizations

    One commenter requested that the Treasury Department and the IRS 
consider the effect of U.S. laws and treaty obligations on the 
applicability of section 4980H to certain operations of foreign states 
and certain international organizations in the United States. Due to 
these applicable U.S. laws and treaty obligations, certain operations 
of foreign states and certain international organizations would not be 
subject to assessable payments under section 4980H. Accordingly, the 
final regulations do not explicitly address this matter. See section 
894(a)(1).

B. Employees Holding H-2A and H-2B Visas

    Commenters, generally representing employers in the agricultural 
industry, requested that holders of H-2A and H-2B visas be exempted 
from the definition of employee for purposes of section 4980H. The 
commenters suggested that such employees are generally seasonal 
workers, but that the exemption for certain seasonal workers for 
purposes of the definition of an applicable large employer, which 
excludes only those seasonal workers employed for a period of no more 
than 120 days, does not adequately address these workers because many 
of these individuals work more than 120 days due to serial growing 
seasons. However, the statutory provisions related to seasonal workers 
are explicit that seasonal workers are employees and that seasonal 
workers may be disregarded for purposes of the determination of whether 
an employer is an applicable large employer only if the seasonal 
workers cause the employer to exceed 50 full-time employees for a 
period of no more than 120 days. Furthermore, no justification was 
provided for exempting holders of H-2B visas, which cover non-
agricultural workers. For these reasons, the final regulations do not 
adopt the suggestion that holders of H-2A and H-2B visas be generally 
exempted from the definition of employee for purposes of section 4980H.
    The final regulations also do not adopt a special rule with respect 
to these workers' status as seasonal employees. The definition of 
seasonal employee is different from the definition of seasonal worker, 
and is relevant to the determination of a worker's status as a full-
time employee for reasons other than the entity's determination of 
status as an applicable large employer. In applying the definition of 
seasonal employee, whether the employee holds any particular visa is 
not relevant. See section VII.C.8 of this preamble for a discussion of 
the definition of a seasonal employee.

C. Employees Performing Services on Cruise Ships

    Representatives of the cruise ship industry requested that services 
performed on a cruise ship be treated as services performed outside the 
United States, meaning that those services would not count as hours of 
service for purposes of identifying an employer as an applicable large 
employer, or an employee as a full-time employee. However, that 
treatment would be inconsistent with the longstanding rules in section 
863(c) that apply to transportation income derived from personal 
services and treat some such income as income from sources within the 
United States. Under the general rules for determining hours of service 
under both the proposed and the final regulations, hours of service do 
not include hours for which an employee receives compensation that is 
taxed as income from sources outside the United States. The final 
regulations clarify that

[[Page 8569]]

this rule applies to transportation employees such as employees of 
cruise ships by specifically stating that hours of service do not 
include hours of service to the extent the compensation for such hours 
of service constitutes income from sources without the United States as 
determined under section 863.
    The commenter also requested that cruise ship employers not be 
subject to section 4980H if they comply with the requirements of the 
Maritime Labor Convention of 2006 and provide employees certain 
coverage while they are on board the vessel. Regardless of whether that 
coverage constitutes MEC under section 5000A, if an offer of coverage 
is not extended to an employee's dependent children, it would fail to 
meet the requirements of an offer under section 4980H (but note that, 
as described in section XI.D of this preamble, the final regulations 
exclude a child who is not a U.S. citizen or national from the 
definition of dependent, unless that child is a resident of a country 
contiguous to the United States or is within the exception for adopted 
children described in section 152(b)(3)(B)). The final regulations do 
not adopt this suggestion.

D. Modifications to the Definition of Hours of Service

    Consistent with the proposed regulations, the final regulations 
exclude from the definition of hours of service those hours the 
compensation for which constitutes income from sources without the 
United States (within the meaning of sections 861 through 863 and the 
regulations thereunder). For this purpose, the term United States means 
United States as defined in section 7701(a)(9), which includes only the 
States and the District of Columbia and does not include the U.S. 
territories. In response to comments, the heading to this provision 
(Sec.  54.4980H-1(a)(24)(ii)(C)) removes the reference to nonresident 
alien individuals, because the application of the provision does not 
depend upon the residency or citizenship status of the employee. In 
addition, the reference to section 862(a)(3) in the proposed 
regulations has been expanded to reference sections 861 through 863, 
and the regulations thereunder, to incorporate all of the special rules 
applicable to the identification of the source of compensation income.

E. Employees Transferring From a Domestic Applicable Large Employer 
Member to a Foreign Applicable Large Employer Member (or Vice Versa)

    One commenter asked whether an employee transferred from a foreign 
entity to a U.S. entity in cases in which the two entities are treated 
as a single employer could be treated as a new hire (and whether an 
employee transferred from a U.S. entity to a foreign entity in the same 
organization could be treated as a terminated employee). The commenter 
pointed out that treatment of the employee as a continuing employee in 
such circumstances may result in certain anomalies, especially in the 
case of an employer using the look-back measurement method. For 
example, if a full-time employee who transferred from a domestic 
corporation to a foreign corporation were treated as a continuing 
employee, the commenter asked whether this means that the stability 
period must continue so that the employee must be offered coverage 
while employed at the foreign corporation to avoid any potential 
liability under section 4980H. In contrast, an employee performing 
services at a foreign corporation generally will have no hours of 
service if compensation for those services is not treated as U.S. 
source income, so if transferred to a domestic corporation and treated 
as a continuing employee such an employee would not have any hours of 
service before the U.S. transfer as part of the measurement period 
utilized by the domestic corporation.
    To avoid these anomalies, the final regulations provide that, for 
both the look-back measurement method and the monthly measurement 
method, an employee who transfers employment from a domestic applicable 
large employer member to a foreign applicable large employer member may 
be treated as having terminated employment, but only if the position is 
anticipated to continue indefinitely or for at least 12 months and if 
substantially all of the compensation received following the transfer 
is treated as foreign-source income.
    With respect to an employee who transfers from a foreign applicable 
large employer member at which the employee's services had not resulted 
in hours of service to a domestic applicable large employer member, if 
the employee had no prior hours of service with the applicable large 
employer (because, for example, the employee had only received non-U.S. 
source income in connection with services performed for the foreign 
applicable large employer member), the employee is treated as a newly 
hired employee by the domestic applicable large employer member. If the 
same transfer occurs with respect to an employee who had prior hours of 
service with the applicable large employer, the period at the foreign 
applicable large employer member may be treated as a period for which 
no hours of service are earned under the rehire rules (if the employee 
did not receive U.S. source income with respect to that period), so 
that if that period is at least 13 weeks in length, the employee is 
treated as a newly hired employee of the domestic applicable large 
employer member. See section VII.E of this preamble for a description 
of the rehire rules.

XV. Transition Relief and Interim Guidance

A. Transition Guidance in the Preamble to the Proposed Regulations

    The preamble to the proposed regulations includes transition 
guidance addressing (1) the application of section 4980H to applicable 
large employers with non-calendar year plans,\11\ (2) salary reduction 
elections for accident and health plans provided through cafeteria 
plans with non-calendar year plan years beginning in 2013, (3) for 
purposes of determining full-time employee status, measurement periods 
for stability periods starting in 2014, (4) the application of section 
4980H to applicable large employer members participating in 
multiemployer plans, (5) the determination of applicable large employer 
status for 2014, (6) the application of section 4980H to an offer of 
coverage to a full-time employee's dependents, and (7) for purposes of 
determining full-time employee status, the variable hour employee 
definition. See 78 FR 218, 236-239. The transition guidance for 
applicable large employer members participating in multiemployer plans 
was clarified in the correction to the proposed regulations. See 78 FR 
16445, 16445-16446. The transition guidance in the preamble to the 
proposed regulations, as corrected, generally applies for 2014 or for 
the plan year beginning in 2014 (but additional broader transition 
relief was provided after the issuance of the proposed regulations; see 
discussion in section XV.B of this preamble.)
---------------------------------------------------------------------------

    \11\ The preamble to the proposed regulations refers to plans 
with plan years other than the calendar year as fiscal year plans. 
To avoid confusion, this preamble refers to these plans as non-
calendar year plans.
---------------------------------------------------------------------------

B. Transition Guidance for 2014--Notice 2013-45

    Section 1513(d) of the Affordable Care Act provides that section 
4980H applies to months after December 31, 2013; however, Notice 2013-
45, issued on July 9, 2013, provides as transition relief that no 
assessable payments under section 4980H will apply for 2014.

[[Page 8570]]

(Transition relief was also provided for the section 6056 information 
reporting requirements for applicable large employers and the section 
6055 information reporting requirements for issuers of MEC.) Notice 
2013-45 provides that the employer shared responsibility provisions 
under section 4980H (and the information reporting provisions) will 
become effective for 2015.\12\
---------------------------------------------------------------------------

    \12\ Also, the preamble to the proposed regulations on MV of 
eligible employer-sponsored plans and other rules regarding the 
health insurance premium tax credit provide transition guidance 
under section 4980H for determining affordability and MV as related 
to wellness programs for plan years of an employer's group health 
plan beginning before January 1, 2015. See 78 FR 25909, 25911-25912 
(May 3, 2013).
---------------------------------------------------------------------------

C. Section 125 Non-Calendar Year Guidance

    The preamble to the proposed regulations provides transition relief 
that allows flexibility for individuals to make changes in salary 
reduction elections for accident and health plans provided through 
section 125 cafeteria plans for non-calendar cafeteria plan years 
beginning in 2013. The scope of this transition relief was clarified in 
section VI of Notice 2013-71, issued on October 31, 2013. Generally, 
the rules allowing employees to change their employer health plan 
elections under a section 125 cafeteria plan do not allow midyear 
changes, see Sec.  1.125-4. Temporary relief was needed because 
generally the section 5000A requirement to maintain coverage is first 
effective on January 1, 2014, and enrollment in qualified health plans 
on an Exchange is first available for 2014. The relief allowed 
employers to amend their plans to permit employees who had not enrolled 
in an employer's plan with a non-calendar plan year that began in 2013 
to enroll in the middle of the plan year in order for the employees to 
maintain coverage for 2014 or if the employees wished to enroll in an 
Exchange plan, to drop enrollment in the employer's plan with a non-
calendar plan year that began in 2013 in the middle of the plan year. 
Both the implementation of section 5000A and the initial availability 
of the qualified health plans on an Exchange were one-time events at 
the beginning of 2014 only affecting employee decisions during 2013 
non-calendar plan years. Consequently, these rules are not extended for 
non-calendar cafeteria plan years beginning in 2014.

D. Transition Guidance for 2015

1. Non-Calendar Year Plans
    Section IX.A of the preamble to the proposed regulations provides 
transition guidance for the period prior to the first day of the plan 
year beginning in 2014 for employers sponsoring non-calendar year 
plans. 78 FR 218, 236.
    The following three pieces of transition guidance apply for the 
period before the first day of the first non-calendar year plan year 
beginning in 2015 (the 2015 plan year) for employers that maintained 
non-calendar year plans as of December 27, 2012, if the plan year was 
not modified after December 27, 2012, to begin at a later calendar 
date. The first two pieces (pre-2015 eligibility transition guidance 
and significant percentage transition guidance (all employees)) are 
extensions of the rules provided in section IX.A of the preamble to the 
proposed regulations. A new option (significant percentage transition 
guidance (full-time employees)) is added in this preamble.
    In essence, this guidance provides transition relief for the period 
before the first day of the 2015 plan year with respect to all 
employees who, under the eligibility terms of the plan as in effect on 
February 9, 2014, are eligible as of the first day of the 2015 plan 
year for coverage under a non-calendar year plan, and who are offered, 
no later than the first day of the 2015 plan year, affordable coverage 
that provides MV. Also, in general, unless the employees described in 
the preceding sentence comprise an insufficient percentage of all the 
employer's employees, this guidance also provides relief with respect 
to all other employees of the employer who are offered affordable 
coverage that provides MV as of the first day of the 2015 plan year. 
This exception reflects that the need for transition relief enabling 
employers to begin offering coverage to employees who are not currently 
offered coverage at the beginning of a non-calendar year plan year, in 
order to coincide with the program for employees currently offered 
coverage, is not as compelling if the number of existing employees 
eligible for coverage under a non-calendar year plan is a relatively 
small portion of the employer's total work force.
a. Pre-2015 Eligibility Transition Guidance
    If an applicable large employer member maintained a non-calendar 
year plan as of December 27, 2012, and the plan year was not modified 
after December 27, 2012 to begin at a later calendar date, this rule 
applies with respect to employees of the applicable large employer 
member (whenever hired) who would be eligible for coverage effective 
beginning on the first day of the 2015 plan year under the eligibility 
terms of the plan as in effect on February 9, 2014. If an employee 
described in the preceding sentence is offered affordable coverage that 
provides MV no later than the first day of the 2015 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 2015 plan year. 
To provide relief with respect to employees who are not offered 
coverage during one or more calendar months in 2015 solely because they 
terminate employment before the beginning of the 2015 plan year, this 
relief also applies with respect to an employee who would be eligible 
for coverage effective beginning on the first day of the 2015 plan year 
under the eligibility terms of the plan as in effect on February 9, 
2014, but for the fact that the employee terminated employment (and was 
not rehired) prior to the first day of the 2015 plan year. This relief 
only applies with respect to employees who would not have been eligible 
for coverage under any group health plan maintained by an applicable 
large employer member as of February 9, 2014, that has a calendar year 
plan year.
    Notwithstanding the foregoing, an applicable large employer member 
may be subject to an assessable payment under section 4980H(a) if it 
does not offer coverage to all but five percent (or, if greater, five) 
of its full-time employees (and their dependents) (or, if the 
transition relief set forth in section XV.D.7 of this preamble applies, 
if it does not offer coverage to all but 30 percent of its full-time 
employees (and their dependents)) as of the first day of the 2015 plan 
year. If an applicable large employer member does not do so, an 
assessable payment under section 4980H(a) may be due for any calendar 
month in 2015 under the section 4980H(a) rules as applied without 
regard to the relief set forth in this section XV.D.1.a of the 
preamble. See section XV.D.5 of this preamble for transition relief 
regarding offers of coverage to dependents.
    As an illustration of the application of this rule, assume Employer 
Z has 600 employees, all of whom are full-time employees within the 
meaning of the final regulations, and Employer Z maintained a plan with 
an April 1 plan year as of December 27, 2012 (Plan P). Plan P's plan 
year was not modified after December 27, 2012, and all of Employer Z's 
employees are eligible for coverage under Plan P under the eligibility 
terms as in effect on February

[[Page 8571]]

9, 2014, however coverage offered prior to the 2015 plan year is not 
affordable. All of Employer Z's employees are offered affordable 
coverage that provides MV effective no later than April 1, 2015. In 
this case, no section 4980H assessable payment will be due with respect 
to any employee of Employer Z for the period before April 1, 2015. The 
same transition relief would apply to those 600 employees even if 
Employer Z also had a calendar year plan (Plan Q) and had a total of 
1,000 full-time employees, 600 of whom were described above (and were 
not eligible for coverage under Plan Q) and 400 of whom were eligible 
for coverage under Plan Q as of January 1, 2015. However, the same 
transition relief would not apply to those 600 employees if as of April 
1, 2015, the 400 other employees were not offered coverage (because as 
of that date Employer Z would not have offered coverage to all but five 
percent (or, if greater, five) of its full-time employees (and their 
dependents)) (and if the transition relief set forth in section XV.D.7 
of this preamble applied, as of that date Employer Z would not have 
offered coverage to all but 30 percent of its full-time employees (and 
their dependents)).
b. Significant Percentage Transition Guidance (All Employees)
    Additional transition guidance is also provided for employers that 
maintained a non-calendar year plan as of December 27, 2012 (or that 
maintained two or more non-calendar year plans that have the same plan 
year as of December 27, 2012), if the plan year of the non-calendar 
year plan was not modified to begin after December 27, 2012, at a later 
calendar date after December 27, 2012, and that either--(1) had, as of 
any date in the 12 months ending on February 9, 2014, at least one 
quarter of its employees covered under those non-calendar year plans, 
or (2) offered coverage under those plans to one third or more of its 
employees during the open enrollment period that ended most recently 
before February 9, 2014. Under the additional transition guidance in 
this section, no assessable payment under section 4980H will be due for 
any month prior to the first day of the 2015 plan year with respect to 
employees who (1) are offered affordable coverage that provides MV no 
later than the first day of the 2015 plan year, and (2) would not have 
been eligible for coverage under any group health plan maintained by 
the applicable large employer member as of February 9, 2014, that has a 
calendar year plan year. Notwithstanding the foregoing, if an 
applicable large employer member does not offer coverage to all but 
five percent (or, if greater, five) of its full-time employees (and 
their dependents) (or, if the transition relief set forth in section 
XV.D.7 of this preamble applies, if it does not offer coverage to all 
but 30 percent of its full-time employees (and their dependents)) as of 
the first day of the 2015 plan year, an assessable payment under 
section 4980H(a) may be due for any calendar month in 2015 under the 
section 4980H(a) rules as applied without regard to the relief set 
forth in this section XV.D.1.b of the preamble. See section XV.D.5 of 
this preamble for transition relief regarding offers of coverage to 
dependents.
    For example, assume Employer Y has 1,100 employees. One thousand of 
Employer Y's employees are full-time employees and 100 of Employer Y's 
employees are not full-time employees. Employer Y maintained a plan 
with a July 1 plan year (Plan M) as of December 27, 2012. Plan M's plan 
year was not modified after December 27, 2012, to begin at a later 
calendar date. Employer Y does not offer any coverage other than Plan 
M.
    For purposes of applying the significant percentage transition 
guidance (all employees), Employer Y chooses December 1, 2013, as the 
date in the 12 months ending on February 9, 2014, to measure the number 
of employees it covered under Plan M. On December 1, 2013, Plan M 
covered 23 percent of Employer Y's employees (253 out of 1,100). During 
the open enrollment period that ended most recently before February 9, 
2014, Employer Y offered coverage under Plan M to 45 percent of its 
employees (495 out of 1,100). As of the first day of the 2015 plan year 
(July 1, 2015), Employer Y offers affordable coverage that provides MV 
under Plan M to all full-time employees. Employer Y does not offer 
coverage to employees who are not full-time employees.
    Under the significant percentage transition guidance (all 
employees), no section 4980H assessable payment will be due with 
respect to any of the full-time employees of Employer Y for the period 
before July 1, 2015, because Employer Y offered coverage to 45 percent 
(which exceeds one third) of its employees during the open enrollment 
period that ended most recently before February 9, 2014, and the full-
time employees of Employer Y are offered affordable coverage that 
provides MV no later than the first day of the 2015 plan year (July 1, 
2015).
    Relief is not provided under the significant percentage transition 
guidance (all employees) with respect to the 100 employees who are not 
full-time employees and to whom coverage is not offered as of July 1, 
2015, but no relief is necessary for these employees because an 
employer is not liable for an assessable payment under section 4980H 
for failure to offer coverage to an employee who is not a full-time 
employee; however, nothing in section 4980H precludes an employer from 
providing coverage to employees who are not full-time employees.
c. Significant Percentage Transition Guidance (Full-Time Employees)
    Commenters noted that because the significant percentage transition 
guidance (all employees), as set forth in section IX.A of the preamble 
to the proposed regulations and generally extended in section XV.D.1.b 
of this preamble, applies based on the total number of employees, 
including seasonal and part-time employees, employers with large 
numbers of seasonal or part-time employees might not be able to meet 
the requirements of the significant percentage transition guidance (all 
employees), regardless of the percentage of full-time employees 
eligible for or enrolled in health care coverage. Commenters requested 
that the significant percentage transition guidance (all employees) 
take into account only full-time employees (within the meaning of 
section 4980H).
    Additional transition guidance is provided for employers that, as 
of December 27, 2012, maintained a non-calendar year plan (or two or 
more such plans that, as of that date, have the same plan year) if the 
plan year was not modified to begin after that date to begin at a later 
calendar date, and if the employer either--(1) had, as of any date in 
the 12 months ending on February 9, 2014, at least one third of its 
full-time employees covered under those non-calendar year plans, or (2) 
offered coverage under those plans to one half or more of its full-time 
employees during the open enrollment period that ended most recently 
before February 9, 2014. Under the additional transition guidance in 
this section XV.D.1.c of the preamble, no payment under section 4980H 
will be due for any month prior to the first day of the 2015 plan year 
with respect to full-time employees who (1) are offered affordable 
coverage that provides MV no later than the first day of the 2015 plan 
year, and (2) would not have been eligible for coverage under any group 
health plan maintained by the applicable large employer member as of 
February 9, 2014, that has a calendar year plan year. Notwithstanding 
the foregoing, if an applicable large employer member does not offer 
coverage to all but five percent

[[Page 8572]]

(or, if greater, five) of its full-time employees (and their 
dependents) (or, if the transition relief set forth in section XV.D.7 
of this preamble applies, if it does not offer coverage to all but 30 
percent of its full-time employees (and their dependents)) as of the 
first day of the 2015 plan year, an assessable payment under section 
4980H(a) may be due for any calendar month in 2015 under the section 
4980H(a) rules as applied without regard to the relief set forth in 
this section XV.D.1.c of the preamble. See section XV.D.5 of this 
preamble for transition relief regarding offers of coverage to 
dependents.
    For example, assume Employer W has 2,000 employees, of whom 500 are 
full-time employees and 1,500 are not full-time employees. Employer W 
maintained a plan with a July 1 plan year (Plan N) as of December 27, 
2012. Plan N's plan year was not modified after December 27, 2012. 
Employer W does not offer any coverage other than Plan N.
    For purposes of applying the significant percentage transition 
guidance (full-time employees), Employer W chooses December 1, 2013, as 
the date in the 12 months ending on February 9, 2014, to count the 
number of full-time employees it covered under Plan N. On December 1, 
2013, Plan N covered 20 percent of Employer W's full-time employees 
(100 of 500).
    During the open enrollment period that ended most recently before 
February 9, 2014, Employer W offered coverage under Plan N to 60 
percent of its full-time employees (that is, 300 of 500). As of the 
first day of the 2015 plan year (July 1, 2015), Employer W offers 
affordable coverage that provides MV under Plan N to all full-time 
employees. Employer W does not offer coverage to employees who are not 
full-time employees.
    Under the significant percentage transition guidance (full-time 
employees), no section 4980H assessable payment will be due with 
respect to Employer W's full-time employees for the period before July 
1, 2015, because Employer W offered coverage to at least one half of 
its full-time employees during the open enrollment period that ended 
most recently before February 9, 2014, and the full-time employees of 
Employer W are offered affordable coverage that provides MV no later 
than the first day of the 2015 plan year (July 1, 2015).
    Relief is not provided under the significant percentage transition 
guidance (full-time employees) with respect to Employer W's employees 
that are not full-time employees, but no relief is necessary for these 
employees because an employer is not liable for an assessable payment 
under section 4980H for failure to offer coverage to an employee who is 
not a full-time employee; however, nothing in section 4980H precludes 
an employer from providing coverage to employees who are not full-time 
employees.
d. Requirement of No Change to Plan Year
    The transition guidance for applicable large employer members 
sponsoring non-calendar year plans set forth in section XV.D.1 of this 
preamble are available for a non-calendar year plan only if that plan's 
plan year was not modified after December 27, 2012, to begin at a later 
calendar date. For example, if, as of December 27, 2012, an applicable 
large employer member sponsored a non-calendar year plan with a plan 
year starting on July 1 and later changed the start of the plan year to 
December 1, the transition guidance for applicable large employer 
members sponsoring non-calendar year plans set forth in section XV.D.1 
of this preamble would not apply.
e. Section 6056 Reporting for 2015 Transition Period for Non-Calendar 
Year Plans
    Employers eligible for the transition guidance for plans with non-
calendar year plan years remain subject to the reporting requirements 
under section 6056 for the entire 2015 calendar year. Because no 
section 4980H liability applies whether or not a full-time employee is 
offered coverage during the portion of the 2014 plan year falling in 
2015, 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 or 
using the look-back measurement method, and use those determinations 
for the reporting required for the period during 2015 that precedes the 
start of the 2015 plan year. In addition, the employer should be able 
to determine whether the coverage offered provides MV and the employee 
portion of the applicable premium in time to complete the required 
reporting for 2015 (that is, for section 6056 returns furnished to 
employees and filed with the IRS in 2016). Because this reporting is 
needed by the employee and the IRS for the administration of the 
premium tax credit, applicable large employers are required to report 
this information for the entire 2015 calendar year, even if during some 
calendar months in 2015 section 4980H liability will not apply by 
reason of the transition guidance for non-calendar year plan years. The 
section 6056 return instructions will provide additional information on 
how to report for 2015.
2. Shorter Measurement Periods Permitted for Stability Period Starting 
During 2015
    For purposes of section 4980H, the 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 with an employer. Section 
4980H(c)(4)(A). Like the proposed regulations, the final regulations 
include an optional alternative method to determine full-time employee 
status (for purposes other than determining applicable large employer 
status) referred to as the look-back measurement method. See section 
VII.C of this preamble for a description of the look-back measurement 
method.
    As an extension of guidance provided in section IX.C of the 
preamble to the proposed regulations, for purposes of stability periods 
beginning in 2015,\13\ employers may adopt a transition measurement 
period that is shorter than 12 consecutive months but that is no less 
than 6 consecutive months and that begins no later than July 1, 2014, 
and ends no earlier than 90 days before the first day of the plan year 
beginning on or after January 1, 2015 (90 days being the maximum 
permissible administrative period). For example, an employer with a 
calendar year plan may use a measurement period from April 15, 2014, 
through October 14, 2014 (six months), followed by an administrative 
period ending on December 31, 2014.
---------------------------------------------------------------------------

    \13\ An employer may continue to rely on the transition relief 
in section IX.C of the preamble to the proposed regulations if the 
employer applies that transition relief to a stability period that 
begins in 2014 and ends in 2015.
---------------------------------------------------------------------------

    As a further example, an employer with a plan year beginning April 
1 that also elected to implement a 90-day administrative period may use 
a measurement period from July 1, 2014, through December 31, 2014 (six 
months), followed by an administrative period ending on March 31, 2015. 
However, an employer with a plan year beginning on July 1 must use a 
measurement period that is longer than 6 months to comply with the 
requirement that the measurement period begin no later than July 1, 
2014, and end no earlier than 90 days before the stability period. For 
example, the employer may have a 10-month measurement period from June 
15, 2014, through April 14, 2015, followed by an administrative period 
from April 15, 2015, through June 30, 2015.
    This transition guidance applies to a stability period beginning in 
2015

[[Page 8573]]

through the end of that stability period (including any portion of the 
stability period falling in 2016), and applies to individuals who are 
employees as of the first day of the transition measurement period. For 
employees hired during or after the transition measurement period 
described in this section XV.D.2 of the preamble, the general rules for 
new employees under the look-back measurement method set forth in Sec.  
54.4980H-3(d) apply.
3. Shorter Period Permitted for Determining Applicable Large Employer 
Status for 2015
    An applicable large employer is, with respect to a calendar year, 
an employer that employed an average of at least 50 full-time employees 
(including FTEs) on business days during the preceding calendar year. 
See section 4980H(c)(2); Sec.  54.4980H-2.
    Similar to the transition guidance provided in section IX.E of the 
preamble to the proposed regulations, for the 2015 calendar year, an 
employer may 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, during the 2014 calendar year (rather than the 
entire 2014 calendar year). Thus, an employer may determine whether it 
is an applicable large employer for 2015 by determining whether it 
employed an average of at least 50 full-time employees (including FTEs) 
on business days during any consecutive six-month period in 2014. 
Whether an employer meets the requirements of the seasonal worker 
exception, as described in section V.C of this preamble, for purposes 
of determining applicable large employer status for 2015 is based on 
the calendar year, rather than on the calendar months chosen by the 
employer under the 2015 applicable large employer transition guidance, 
if applicable. See section V of this preamble for a discussion of the 
determination of status as an applicable large employer.
    This guidance allows employers to choose to use either a period to 
prepare to count their employees or a period afterward to ascertain and 
implement the results of the determination, or both. For example, an 
employer could use at least six months through August 2014 to determine 
its applicable large employer status and, if it is an applicable large 
employer, the period from September through December 2014 to make any 
needed adjustments to its plan (or to establish a plan).
    Commenters noted that, under the transition guidance for applicable 
large employer status in 2014, the hours of service (or lack of hours 
of service) during the summer season could be taken into account by 
schools in determining applicable large employer status even though, 
during the summer, employees may provide no formal, in-school service. 
These commenters expressed concern that this would affect the 
educational employer's total number of full-time employees and status 
as an applicable large employer by overweighting the summer period in 
relation to the non-summer academic year. The Treasury Department and 
the IRS understand this concern and have considered various options for 
addressing these comments in developing this transition guidance, but 
have concluded that the options for addressing this concern (such as 
basing the rule on non-consecutive months or applying an employee-by-
employee rule such as the employment break period rule set forth in 
Sec.  54.4980H-3(d)(6)(ii)(B)) would add more complexity and 
administrative burden than is justified for a rule that applies only 
for 2015.
    Also note that in addition to this transition rule, as described in 
section V.F of this preamble, the final regulations provide with 
respect to an employee who was not offered coverage at any point in the 
prior calendar year, if an employer that is an applicable large 
employer for the first time offers the employee coverage at or before 
April 1 of the first year in which the employer is an applicable large 
employer, the employer will not be subject to an assessable payment 
under section 4980H by reason of its failure to offer coverage to the 
employee for January through March of that year, provided that in order 
to avoid an assessable payment under section 4980H(b), the coverage 
offered on or before April 1 provides MV.
    In addition, section XV.D.6 of this preamble provides 2015 
transition relief for certain applicable large employers with fewer 
than 100 full-time employees (including FTEs). The rule described in 
this section XV.D.3 of the preamble may be used by an applicable large 
employer to determine its number of full-time employees (including 
FTEs) for purposes of the transition rule set forth in section XV.D.6 
of this preamble.
4. Offer of Coverage for January 2015
    The final regulations provide, in general, that 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. See Sec.  54.4980H-4(c).
    The Treasury Department and the IRS understand that many employers 
offer coverage for a new year effective as of the first day of the 
first pay period beginning on or after the first day of the year, and 
that questions have arisen as to whether a full-time employee will be 
treated as having been offered coverage for the first month to which 
section 4980H applies if the offer of coverage applies no later than 
the first day of the first payroll period that begins in that month.
    Solely for purposes of January 2015, if an applicable large 
employer member offers coverage to a full-time employee no later than 
the first day of the first payroll period that begins in January 2015, 
the employee will be treated as having been offered coverage for 
January 2015. This transition guidance, which was not contained in the 
preamble to the proposed regulations, applies only for January 2015.
5. Coverage for Dependents
    In order to avoid a potential assessable payment under section 
4980H, an applicable large employer member must offer coverage to its 
full-time employees and the full-time employees' dependents. To provide 
employers sufficient time to expand their health plans to add dependent 
coverage, section IX.F of the preamble to the proposed regulations 
provides that any employer that takes steps during its plan year that 
begins in 2014 (2014 plan year) toward satisfying the section 4980H 
provisions relating to offering 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.
    This relief is extended to plan years that begin in 2015 (2015 plan 
years). It applies to employers for the 2015 plan year with respect to 
plans under which (1) dependent coverage is not offered, (2) dependent 
coverage that does not constitute MEC is offered, or (3) dependent 
coverage is offered for some, but not all, dependents.
    The relief is not available to the extent the employer offered 
dependent coverage during either the plan year that begins in 2013 
(2013 plan year) or the 2014 plan year (meaning the relief is not 
available to the extent the employer had offered dependent coverage 
during either of those plan years and subsequently dropped that offer 
of coverage). If coverage was offered to some, but not all, dependents 
during the 2013 or 2014 plan year, the relief as extended applies only 
with respect to dependents who were not offered

[[Page 8574]]

coverage at any time during the 2013 or 2014 plan year (in other words, 
the relief as extended applies only with respect to dependents who were 
without an offer of coverage from the employer in both the 2013 and 
2014 plan years). In addition, the relief is available only if the 
employer takes steps during the 2014 or 2015 plan year (or both) to 
extend coverage under the plan to dependents not offered coverage 
during the 2013 or 2014 plan year (or both). References in this section 
XV.D.5 of the preamble to dependents refer to dependents of the 
employer's full-time employees, and references to coverage (other than 
specific references to coverage that does not constitute MEC) refer to 
MEC. For a discussion of the definition of dependent under the final 
regulations, including the treatment of stepchildren and foster 
children, see section XI of this preamble.
6. 2015 Transition Relief for Applicable Large Employers With Fewer 
Than 100 Full-Time Employees (Including FTEs)
    The Treasury Department and the IRS understand that application of 
section 4980H will involve changes for applicable large employers that 
did not previously offer coverage, or that did not offer affordable, 
minimum value coverage. A large percentage of those employers are in 
the smaller size range, such as those with fewer than 100 full-time 
employees (including FTEs). To assist these employers in transitioning 
into compliance with section 4980H, the transition relief described 
below is provided for all of 2015 plus, in the case of any non-calendar 
plan year that begins in 2015 (2015 plan year), the portion of that 
2015 plan year that falls in 2016. For employers eligible for the 
transition relief described in this section XV.D.6, no assessable 
payment under section 4980H(a) or (b) will apply for any calendar month 
during 2015 or any calendar month during the portion of the 2015 plan 
year that falls in 2016.
a. Eligibility Conditions for Transition Relief
    An employer is eligible for the transition relief described in this 
section XV.D.6 if it satisfies the following conditions:
    (1) Limited Workforce Size. The employer employs on average at 
least 50 full-time employees (including FTEs) but fewer than 100 full-
time employees (including FTEs) on business days during 2014. For this 
purpose, the determination of the number of full-time employees 
(including FTEs) is made in accordance with the otherwise applicable 
rules for determining status as an applicable large employer.\14\
---------------------------------------------------------------------------

    \14\ The rules for determining status as an applicable large 
employer include application of the aggregation rules under section 
414 (see Sec.  54.4980H-1(a)(16)), the rule regarding employers 
whose workforce exceeds the applicable threshold (which for this 
purpose is 99) for 120 days or fewer during the calendar year due to 
the employment of seasonal workers (see Sec.  54.4980H-2(b)(2)), and 
the transition relief permitting the use of any consecutive month 
period during 2014 of at least six months in lieu of the entire 
calendar year as provided in section XV.D.3 of this preamble.
---------------------------------------------------------------------------

    (2) Maintenance of Workforce and Aggregate Hours of Service. During 
the period beginning on February 9, 2014, and ending on December 31, 
2014, the employer does not reduce the size of its workforce or the 
overall hours of service of its employees in order to satisfy the 
workforce size condition set forth in paragraph (1) of this section 
XV.D.6. A reduction in workforce size or overall hours of service for 
bona fide business reasons will not be considered to have been made in 
order to satisfy the workforce size condition. For example, reductions 
of workforce size or overall hours of service because of business 
activity such as the sale of a division, changes in the economic 
marketplace in which the employer operates, terminations of employment 
for poor performance, or other similar changes unrelated to eligibility 
for the transition relief provided in this section XV.D.6 are for bona 
fide business reasons and will not affect eligibility for that 
transition relief.
    (3) Maintenance of Previously Offered Health Coverage. Except as 
otherwise provided in this paragraph (3), during the coverage 
maintenance period the employer does not eliminate or materially reduce 
the health coverage, if any, it offered as of February 9, 2014. For 
purposes of this paragraph (3), in no event will an employer be treated 
as eliminating or materially reducing health coverage if (i) it 
continues to offer each employee who is eligible for coverage during 
the coverage maintenance period an employer contribution toward the 
cost of employee-only coverage that either (A) is at least 95 percent 
of the dollar amount of the contribution toward such coverage that the 
employer was offering on February 9, 2014, or (B) is the same (or a 
higher) percentage of the cost of coverage that the employer was 
offering to contribute toward coverage on February 9, 2014; (ii) in the 
event there is a change in benefits under the employee-only coverage 
offered, that coverage provides minimum value after the change; and 
(iii) the employer does not alter the terms of its group health plans 
to narrow or reduce the class or classes of employees (or the 
employees' dependents) to whom coverage under those plans was offered 
on February 9, 2014. For purposes of this paragraph, the term coverage 
maintenance period means (1) for an employer with a calendar year plan, 
the period beginning on February 9, 2014, and ending on December 31, 
2015, and (2) for an employer with a non-calendar year plan, the period 
beginning on February 9, 2014, and ending on the last day of the plan 
year that begins in 2015.
    For example, if on February 9, 2014, an employer was contributing 
$300 per month for coverage that costs $400 per month for employee-only 
coverage, and the employer continues to offer to contribute $300 per 
month after the cost of employee-only coverage increases to $425 per 
month for the plan year beginning on July 1, 2014, the increase in cost 
to the employee will not be treated for this purpose as an elimination 
or material reduction of health coverage offered.
    (4) Certification of Eligibility for Transition Relief. The 
applicable large employer certifies on a prescribed form that it meets 
the eligibility requirements set forth in paragraphs (1) through (3). 
The forthcoming final regulations under section 6056 are expected to 
provide that an applicable large employer, or an applicable large 
employer member, that otherwise qualifies for the transition relief 
described in this section XV.D.6 will provide this certification as 
part of the transmittal form it is required to file with the IRS under 
the section 6056 regulations, in accordance with the instructions to 
that transmittal form. See section III of the preamble regarding 
section 6056.
b. Application of Transition Relief to Non-Calendar Year Plans
    The transition relief described in this section XV.D.6 applies to 
all calendar months of 2015 plus any calendar months of 2016 that fall 
within the 2015 plan year. It is not available for an employer that 
modifies the plan year of its plan after February 9, 2014, to begin on 
a later calendar date (for example, changing the start date of the plan 
year from January 1 to December 1). Notwithstanding paragraph (a)(3) of 
this section XV.D.6, an employer with a non-calendar year plan meeting 
the coverage maintenance period requirements for 2015 may be eligible 
for the relief for 2015 even if the employer does not meet the coverage 
maintenance period requirements later (during the portion of the 2015 
plan year falling in 2016).

[[Page 8575]]

c. Application of Transition Relief to New Employers
    As described in section V.B of this preamble, an employer that was 
not in existence on any day of the previous calendar year may be an 
applicable large employer for the current calendar year if the employer 
is reasonably expected to employ an average of at least 50 full-time 
employees (including FTEs) on business days during the current calendar 
year and it actually employs an average of at least 50 full-time 
employees (including FTEs) on business days during the calendar year. 
For employers first coming into existence in 2015 that are applicable 
large employers under the standard in the preceding sentence, the 
relief described in this section XV.D.6 applies if (1) the employer 
reasonably expects to employ and actually employs fewer than 100 full-
time employees (including FTEs) on business days during 2015, (2) the 
employer reasonably expects to meet and actually meets the maintenance 
standards described in paragraphs (2) and (3) above, as measured from 
the date the employer is first in existence, and (3) the employer 
certifies in the manner described in paragraph (4) above.
d. Coordination With Other Transition Relief
    For periods on or after January 1, 2016 (or, if applicable, for any 
period after the last day of the 2015 plan year), the transition relief 
set forth in section XV.D.1 (non-calendar plan years), section XV.D.2 
(shorter measurement periods permitted for stability period starting 
during 2015), section XV.D.4 (offer of coverage for January 2015), 
section XV.D.5 (coverage for dependents), and section XV.D.7 (limited 
2015 section 4980H(a) transition relief) of the preamble will not be 
available. The transition relief listed in the prior sentence is 
available only with respect to 2015 or, if applicable, the 2015 plan 
year and does not apply to an applicable large employer that is 
eligible for the relief described in this section XV.D.6 because that 
eligible employer will first become subject to a potential assessable 
payment under section 4980H after 2015 or, if applicable, after the 
2015 plan year and, accordingly, already will have had the benefit of 
an extra year to plan for and implement changes. However, an employer 
may use the rule set forth in section XV.D.3 of the preamble (shorter 
period in 2014 permitted for determining applicable large employer 
status for 2015) in determining applicable large employer status and 
full-time employee count for 2015 (but not for any subsequent 
year).\15\
---------------------------------------------------------------------------

    \15\ Section 54.4980H-2(b)(5) of the final regulations provides 
a transition rule for an employer's first year as an applicable 
large employer, subject to certain conditions. Because an employer 
qualifies for the relief set forth in Sec.  54.4980H-2(b)(5) only 
for the first year that the employer is an applicable large 
employer, the relief set forth in Sec.  54.4980H-2(b)(5) will not be 
available to an applicable large employer that is eligible for the 
relief described in this section XV.D.6 for the first year for which 
the employer may be subject to an assessable payment under section 
4980H (generally 2016).
---------------------------------------------------------------------------

e. Example
    The following example illustrates the transition relief described 
in this section XV.D.6 of the preamble:
    (i) Facts. As of February 9, 2014, Employer A sponsors a group 
health plan with a calendar year plan year under which 40 of its full-
time employees are offered coverage with an employer contribution of 
$300 per month for employee-only coverage. The offer of coverage is 
affordable with respect to some, but not all, of Employer A's full-time 
employees. During the period from February 9, 2014, through December 
31, 2014, two of Employer A's employees voluntarily terminate 
employment and Employer A terminates three employees because of the 
non-renewal of a customer contract but does not otherwise reduce the 
size of its workforce or reduce any employee's hours of service. Had 
those five employees continued in employment throughout 2014, the 
employer would have had an average of 100 full-time employees 
(including FTEs) on business days in 2014. However, as a result of the 
terminations, it had an average of only 97 full-time employees 
(including FTEs) for business days in 2014. During the coverage 
maintenance period, Employer A does not change the eligibility 
requirements for the group health plan (including not amending it to 
eliminate its existing health coverage for dependents) and continues to 
make an employer contribution of $300 per month toward the cost of 
employee-only coverage that provides minimum valve. Employer A 
certifies in a timely manner as to its eligibility for the transition 
relief.
    (ii) Conclusion. Employer A will not be subject to an assessable 
payment under section 4980H(a) or (b) for 2015.
7. Limited 2015 Section 4980H(a) Transition Relief
a. Offers of Coverage to at Least 70 Percent (Rather Than 95 Percent) 
of Full-Time Employees (and Their Dependents)
    For purposes of section 4980H(a), the final regulations provide 
that an applicable large employer member is treated as offering 
coverage to its full-time employees (and their dependents) for a month 
if, for that month, it offers coverage to all but five percent or, if 
greater, five, of its full-time employees. As provided in Sec.  
54.4980H-4(a), an employee is treated as having been offered coverage 
only if the employer also offered coverage to that employee's 
dependents. But see section XV.D.5 of this preamble for transition 
relief for a failure to offer coverage to dependents for the 2015 plan 
year.
    As further transition relief, for each calendar month during 2015 
and any calendar months during the 2015 plan year that fall in 2016, an 
applicable large employer member that offers coverage to at least 70 
percent (or that fails to offer to no more than 30 percent) of its 
full-time employees (and, to the extent required under Sec.  54.4980H-
4(a) and the transition relief in section XV.D.5 of this preamble, 
their dependents) will not be subject to an assessable payment under 
section 4980H(a). Applicable large employer members qualifying for the 
transition relief set forth in this section XV.D.7.a continue to be 
subject to a potential assessable payment under section 4980H(b).
b. Calculation of Assessable Payments Under Section 4980H(a) for 
Applicable Large Employers With 100 or More Full-Time Employees 
(Including FTEs) for 2015
    In general, an assessable payment under section 4980H(a) is equal 
to the number of all full-time employees (excluding 30 full-time 
employees) multiplied by one-twelfth of $2,000 for each calendar month. 
For purposes of the liability calculation under section 4980H(a), with 
respect to each calendar month, an applicable large employer member's 
number of full-time employees is reduced by that member's allocable 
share of 30. Accordingly, an applicable large employer with 50 full-
time employees that is subject to an assessable payment under section 
4980H(a) may be subject to an assessable payment based on 20 employees 
(that is, 50 minus 30) times one-twelfth of $2,000 for each calendar 
month. An applicable large employer member's allocation is equal to 30

[[Page 8576]]

allocated ratably among all 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 month. See Sec.  
54.4980H-4(e).
    For 2015 plus any calendar months of 2016 that fall within the 
employer's 2015 plan year, if an applicable large employer with 100 or 
more full-time employees (including FTEs) on business days during 2014 
(or an applicable large employer member that is part of such an 
applicable large employer) is subject to an assessable payment under 
section 4980H(a), the assessable payment under section 4980H(a) with 
respect to the transition relief period will be calculated by reducing 
an applicable large employer member's number of full-time employees by 
that member's allocable share of 80 rather than 30. The rules set forth 
in Sec.  54.4980H-4(e) apply with respect to allocation of the 
reduction by 80 full-time employees for the applicable large employer. 
For this transition relief period, the aggregate amount of assessable 
payment determined under section 4980H(b) for an applicable large 
employer member also may not exceed the potential assessable payment 
under section 4980H(a), including the reduction by the ratable portion 
of 80 as set forth in this paragraph, for that applicable large 
employer member.\16\
---------------------------------------------------------------------------

    \16\ The number 80 applies for purposes of the 2015 transition 
rule in lieu of the number 30 that applies under the general rule 
because this maintains the same 20-full-time-employee difference 
between the applicable threshold number (50 under the general rule; 
100 under the 2015 transition rule) and the number of full-time 
employees (30 under the general rule; 80 under the 2015 transition 
rule) by which the applicable large employer's number of full-time 
employees is reduced.
---------------------------------------------------------------------------

c. Application to Non-Calendar Year Plans
    The transition relief described in this section XV.D.7 applies to 
all calendar months of 2015 plus any calendar months of 2016 that fall 
within the employer's 2015 plan year, and is available for an employer 
only if it did not modify the plan year of its plan after February 9, 
2014, to begin on a later calendar date (for example, changing the 
start date of the plan year from January 1 to December 1).
d. Coordination With Other Transition Relief
    The relief described in this section XV.D.7 of the preamble applies 
in addition to the forms of transition relief described in section 
XV.D.1 (non-calendar plan years), section XV.D.2 (shorter measurement 
periods permitted for stability period starting during 2015), section 
XV.D.3 (shorter period permitted in 2014 for determining applicable 
large employer status for 2015), section XV.D.4 (offer of coverage for 
January 2015), and section XV.D.5 (coverage for dependents) of this 
preamble.

E. Interim Guidance With Respect to Multiemployer Arrangements

    In response to commenters' requests for special rules for employers 
participating in multiemployer plans in view of such plans' unique 
operating structures, section IX.D of the preamble to the proposed 
regulations, as corrected, contains transition guidance that is 
intended to provide an administratively feasible means for employers 
that contribute to multiemployer plans to comply with section 4980H.
    Pursuant to this preamble, employers may rely on the interim 
guidance described in this section XV.E. This interim guidance is 
intended to continue the transition guidance originally set forth in 
section IX.D of the preamble to the proposed regulations, as corrected, 
and as clarified in this preamble. Any future guidance that limits the 
scope of the interim guidance will be applied prospectively and will 
apply no earlier than January 1 of the calendar year beginning at least 
six months after the date of issuance of the guidance.
    This interim guidance applies to an applicable large employer 
member that is required by a collective bargaining agreement or an 
appropriate related participation agreement to make contributions, with 
respect to some or all of its employees, to a multiemployer plan that 
offers, to individuals who satisfy the plan's eligibility conditions, 
coverage that is affordable and provides MV, and that offers coverage 
to those individuals' dependents. Under this interim guidance, the 
applicable large employer member will not be treated, with respect to 
employees for whom the employer is required by the collective 
bargaining agreement or appropriate related participation agreement to 
make contributions to the multiemployer plan, as failing to offer the 
opportunity to enroll in MEC to full-time employees (and their 
dependents) for purposes of section 4980H(a), and will not be subject 
to an assessable payment under section 4980H(b). For purposes of this 
section XV.E of the preamble, whether the employee is a full-time 
employee is determined under section 4980H(c)(4), whether coverage is 
affordable is determined under section 36B(c)(2)(C)(i), and whether 
coverage provides MV is determined under section 36B(c)(2)(C)(ii).
    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 final 
regulations. 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 or participation agreement.
    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 member contributes to one 
or more multiemployer plans and also maintains a single employer plan, 
the interim guidance applies to each multiemployer plan but not to the 
single employer plan.
    One commenter asked whether the rule set out in section IX.D of the 
preamble to the proposed regulations, as corrected, applies to non-
federal governmental multiemployer plans. The commenter noted that the 
proposed regulations do not define multiemployer plan but that section 
414(f)(1) defines a multiemployer plan as a plan (A) to which more than 
one employer is required to contribute, (B) which is maintained 
pursuant to one or more collective bargaining agreements between one or 
more employee organizations and more than one employer, and (C) which 
satisfies such other requirements as the Secretary of Labor may 
prescribe by regulation. The commenter asked whether the rule set out 
in section IX.D of the preamble to the proposed regulations, as 
corrected, applies to public sector multiemployer plans which are not 
subject to the jurisdiction of DOL. The rule set out in section IX.D of 
the preamble to the proposed regulations and in this section of the 
preamble applies to a multiemployer plan that is not subject to the 
jurisdiction of DOL if the plan meets the requirements of section 
414(f)(1)(A) and (B).

[[Page 8577]]

XVI. Effective Dates and Reliance

    Section 1513(d) of the Affordable Care Act provides that section 
4980H applies to months beginning after December 31, 2013; however, 
Notice 2013-45 provides transition relief from section 4980H for 2014.
    These final regulations are effective February 12, 2014. These 
final regulations are applicable for periods after December 31, 2014. 
Employers may rely on these final regulations for periods before 
January 1, 2015. If and to the extent an employer has relied on Notice 
2012-58, the employer may continue to rely on Notice 2012-58 to the 
extent reliance is provided in section IV of that notice.

Availability of IRS Documents

    The IRS notices and other IRS guidance cited in this preamble are 
available in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b)).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It has been determined that section 553(b) 
of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply 
to these regulations, and because the regulations do not impose a 
collection of information requirement on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) (RFA) does not apply.
    Pursuant to section 7805(f) of the Code, the proposed regulations 
were submitted to the Chief Counsel for Advocacy of the Small Business 
Administration (SBA Chief Counsel for Advocacy) for comment on their 
impact on small business, and the SBA Chief Counsel for Advocacy 
submitted comments on the regulations. The SBA Chief Counsel for 
Advocacy disagreed with the statement that the RFA does not apply to 
the proposed regulations because the regulations do not impose a 
collection of information on small entities. Specifically, the SBA 
Chief Counsel for Advocacy stated that the proposed regulations impose 
a collection because they require employers to maintain records for a 
number of calculations and the determination of whether employers are 
subject to section 4980H, including calculating full-time employees and 
FTEs and calculating affordability. However, the regulations do not 
contain any recordkeeping requirement. For purposes of the RFA, a 
recordkeeping requirement is a mandate to maintain specified records. 5 
U.S.C. 601(8). Therefore, to constitute a recordkeeping requirement, 
the mandate to maintain specified records must be a requirement in 
addition to the general requirement in section 6001 that taxpayers must 
keep adequate books and records to support what they reported on their 
return. Thus, because a recordkeeping requirement is one that requires 
specified records, a regulation that does not require that particular 
records be maintained, but nonetheless prompts some taxpayers to 
maintain records consistent with the provisions of section 6001, does 
not impose a recordkeeping requirement. Neither the proposed nor final 
regulations require employers to maintain any specified records. 
Rather, the preambles to both the final and the proposed regulations 
provide that the otherwise generally applicable substantiation and 
recordkeeping requirements in section 6001 apply.

Drafting Information

    The principal authors of these final regulations are Kathryn 
Johnson and Shad Fagerland of the Office of the Division Counsel/
Associate Chief Counsel (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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 54, and 301 are 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. Paragraph (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 periods after December 31, 2014.'' is added in 
its place.
    The addition reads 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.
54.4980H-1 Definitions.
54.4980H-2 Applicable large employer and applicable large employer 
member.
54.4980H-3 Determining full-time employees.
54.4980H-4 Assessable payments under section 4980H(a).
54.4980H-5 Assessable payments under section 4980H(b).
54.4980H-6 Administration and procedure.
* * * * *


Sec.  54.4980H-0  Table of contents.

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


Sec.  54.4980H-1  Definitions.

    (a) Definitions.
    (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) Bona fide volunteer.
    (8) Calendar month.
    (9) Church, or a convention or association of churches.
    (10) Collective bargaining agreement.
    (11) Cost-sharing reduction.

[[Page 8578]]

    (12) Dependent.
    (13) Educational organization.
    (14) Eligible employer-sponsored plan.
    (15) Employee.
    (16) Employer.
    (17) Employment break period.
    (18) Exchange.
    (19) Federal poverty line.
    (20) Form W-2 wages.
    (21) Full-time employee.
    (22) Full-time equivalent employee (FTE).
    (23) Government entity.
    (24) Hour of service.
    (25) Initial measurement period.
    (26) Limited non-assessment period for certain employees.
    (27) Minimum essential coverage.
    (28) Minimum value.
    (29) Month.
    (30) New employee.
    (31) Ongoing employee.
    (32) Part-time employee.
    (33) Period of employment.
    (34) Person.
    (35) Plan year.
    (36) Predecessor employer.
    (37) Qualified health plan.
    (38) Seasonal employee.
    (39) Seasonal worker.
    (40) Section 1411 certification.
    (41) Section 4980H(a) applicable payment amount.
    (42) Section 4980H(b) applicable payment amount.
    (43) Self-only coverage.
    (44) Special unpaid leave.
    (45) Stability period.
    (46) Standard measurement period.
    (47) Start date.
    (48) United States.
    (49) Variable hour employee.
    (50) Week.
    (b) Effective/applicability date.


Sec.  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.
    (5) Transition rule for an employer's first year as an applicable 
large employer.
    (c) Full-time equivalent employees (FTEs).
    (1) In general.
    (2) Calculating the number of FTEs.
    (d) Examples.
    (e) Additional guidance.
    (f) Effective/applicability date.


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

    (a) In general.
    (b) Hours of service.
    (1) In general.
    (2) Hourly employees calculation.
    (3) Non-hourly employees calculation.
    (c) Monthly measurement method.
    (1) In general.
    (2) Employee first otherwise eligible for an offer of coverage.
    (3) Use of weekly periods.
    (4) Employees rehired after termination of employment or resuming 
service after other absence.
    (5) Examples.
    (d) Look-back measurement method.
    (1) Ongoing employees.
    (2) New non-variable hour, new non-seasonal and new non-part-time 
employees.
    (3) New variable hour employees, new seasonal employees, and new 
part-time employees.
    (4) Transition from new variable hour employee, new seasonal 
employee, or new part-time employee to ongoing employee.
    (5) Examples.
    (6) Employees rehired after termination of employment or resuming 
service after other absence.
    (e) Use of the look-back measurement method and the monthly 
measurement method for different categories of employees.
    (f) Changes in employment status resulting in a change in full-time 
employee determination method.
    (1) Change in employment status from a position to which a look-
back measurement method applies to a position to which the monthly 
measurement method applies, or vice versa.
    (2) Special rule for certain employees to whom minimum value 
coverage has been continuously offered.
    (g) Nonpayment or late payment of premiums.
    (h) Additional guidance.
    (i) Effective/applicability date.


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

    (a) In general.
    (b) Offer of coverage.
    (1) In general.
    (2) Offer of coverage on behalf of another entity.
    (c) Partial calendar month.
    (d) Application to applicable large employer member.
    (e) Allocated reduction of 30 full-time employees.
    (f) Example.
    (g) Additional guidance.
    (h) Effective/applicability date.


Sec.  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) Additional guidance.
    (g) Effective/applicability date.


Sec.  54.4980H-6  Administration and procedure.

    (a) In general.
    (b) Effective/applicability date.


Sec.  54.4980H-1  Definitions.

    (a) Definitions. The definitions in this section apply only for 
purposes of this section and Sec. Sec.  54.4980H-2 through 54.4980H-6.
    (1) Administrative period. The term administrative period means 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. The administrative period also includes 
the period between a new employee's start date and the beginning of the 
initial measurement period, if the initial measurement period does not 
begin on the employee's start date.
    (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. 36 (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.  54.4980H-2.

[[Page 8579]]

    (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) Bona fide volunteer. The term bona fide volunteer means an 
employee of a government entity or an organization described in section 
501(c) that is exempt from taxation under section 501(a) whose only 
compensation from that entity or organization is in the form of--
    (i) Reimbursement for (or reasonable allowance for) reasonable 
expenses incurred in the performance of services by volunteers, or
    (ii) Reasonable benefits (including length of service awards), and 
nominal fees, customarily paid by similar entities in connection with 
the performance of services by volunteers.
    (8) Calendar month. The term calendar month means one of the 12 
full months named in the calendar, such as January, February, or March.
    (9) 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).
    (10) 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 employee 
representatives and one or more employers satisfies section 
7701(a)(46).
    (11) 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 and 45 CFR 
155.20.
    (12) Dependent. The term dependent means a child (as defined in 
section 152(f)(1) but excluding a stepson, stepdaughter or an eligible 
foster child (and excluding any individual who is excluded from the 
definition of dependent under section 152 by operation of section 
152(b)(3))) 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. A child 
is a dependent for purposes of section 4980H for the entire calendar 
month during which he or she attains age 26. 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. The term dependent does not include the spouse of an 
employee.
    (13) Educational organization. The term educational organization 
means an entity described in Sec.  1.170A-9(c)(1), whether or not 
described in section 501(c)(3) and tax-exempt under section 501(a). 
Thus, the term educational organization includes taxable entities, tax-
exempt entities and government entities.
    (14) Eligible employer-sponsored plan. The term eligible employer-
sponsored plan has the same meaning as provided under section 
5000A(f)(2) and the regulations thereunder and any other applicable 
guidance.
    (15) Employee. The term employee means an individual who is an 
employee under the common-law standard. See Sec.  31.3401(c)-1(b). For 
purposes of this paragraph (a)(15), a leased employee (as defined in 
section 414(n)(2)), a sole proprietor, a partner in a partnership, a 2-
percent S corporation shareholder, or a worker described in section 
3508 is not an employee.
    (16) 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). 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 an entity in an arrangement described 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 (see 
paragraph (a)(36) of this section) and a successor employer.
    (17) Employment break period. The term employment break period 
means a period of at least four consecutive weeks (disregarding special 
unpaid leave), measured in weeks, during which an employee of an 
educational organization is not credited with hours of service for an 
applicable large employer.
    (18) Exchange. The term Exchange means an Exchange as defined in 45 
CFR 155.20.
    (19) Federal poverty line. The term federal poverty line means for 
a plan year any of the 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)) in effect within six months before 
the first day of the plan year of the applicable large employer 
member's health plan, as selected by the applicable large employer 
member.
    (20) 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 (Wage and Tax Statement)) received from an applicable 
large employer.
    (21) Full-time employee--(i) In general. 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 rules on the determination of whether an employee is a 
full-time employee, including a description of the look-back 
measurement method and the monthly measurement method, see Sec.  
54.4980H-3. The look-back measurement method for identifying full-time 
employees is available only for purposes of determining and computing 
liability under section 4980H and not for the purpose of determining 
status as an applicable large employer under Sec.  54.4980H-2.
    (ii) Monthly equivalency. Except as otherwise provided in paragraph 
(a)(21)(iii) of this section, 130 hours of service in a calendar month 
is treated as the monthly equivalent of at least 30 hours of service 
per week, and this 130 hours of service monthly equivalency applies for 
both the look-back measurement method and the monthly measurement 
method for determining full-time employee status.
    (iii) Determination of full-time employee status using weekly rule 
under

[[Page 8580]]

the monthly measurement method. Under the optional weekly rule set 
forth in Sec.  54.4980H-3(c)(3), full-time employee status for certain 
calendar months is based on hours of service over four weekly periods 
and for certain other calendar months is based on hours of service over 
five weekly periods. With respect to a month with four weekly periods, 
an employee with at least 120 hours of service is a full-time employee, 
and with respect to a month with five weekly periods, an employee with 
at least 150 hours of service is a full-time employee. For purposes of 
this rule, the seven continuous calendar days that constitute a week 
(for example Sunday through Saturday) must be consistently applied for 
all calendar months of the calendar year.
    (22) 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).
    (23) 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.
    (24) 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 hours of service, 
see Sec.  54.4980H-3.
    (ii) Excluded hours--(A) Bona fide volunteers. The term hour of 
service does not include any hour for services performed as a bona fide 
volunteer.
    (B) Work-study program. The term hour of service does not include 
any hour for services to the extent those services are performed as 
part of a Federal Work-Study Program as defined under 34 CFR 675 or a 
substantially similar program of a State or political subdivision 
thereof.
    (C) Services outside the United States. The term hour of service 
does not include any hour for services to the extent the compensation 
for those services constitutes income from sources without the United 
States (within the meaning of sections 861 through 863 and the 
regulations thereunder).
    (iii) 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.
    (25) Initial measurement period. The term initial measurement 
period means a period selected by an applicable large employer member 
of at least three consecutive months but not more than 12 consecutive 
months used by the applicable large employer as part of the look-back 
measurement method in Sec.  54.4980H-3(d).
    (26) Limited non-assessment period for certain employees. 
References to the limited non-assessment period for certain employees 
refers to the limited period during which an employer will not be 
subject to an assessable payment under section 4980H(a), and in certain 
cases section 4980H(b), with respect to an employee as set forth in--
    (i) Section 54.4980H-2(b)(5) (regarding the transition rule for an 
employer's first year as an applicable large employer),
    (ii) Section 54.4980H-3(c)(2) (regarding the application of section 
4980H for the three full calendar month period beginning with the first 
full calendar month in which an employee is first otherwise eligible 
for an offer of coverage under the monthly measurement method),
    (iii) Section 54.4980H-3(d)(2)(iii) (regarding the application of 
section 4980H during the initial three full calendar months of 
employment for an employee reasonably expected to be a full-time 
employee at the start date, under the look-back measurement method),
    (iv) Section 54.4980H-3(d)(3)(iii) (regarding the application of 
section 4980H during the initial measurement period to a new variable 
hour employee, seasonal employee or part-time employee determined to be 
employed on average at least 30 hours of service per week, under the 
look-back measurement method),
    (v) Section 54.4980H-3(d)(3)(vii) (regarding the application of 
section 4980H following an employee's change in employment status to a 
full-time employee during the initial measurement period, under the 
look-back measurement method), and
    (vi) Section 54.4980H-4(c) and Sec.  54.4980H-5(c) (regarding the 
application of section 4980H to the calendar month in which an 
employee's start date occurs on a day other than the first day of the 
calendar month).
    (27) 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 guidance thereunder.
    (28) Minimum value. The term minimum value has the same meaning as 
provided in section 36B(c)(2)(C)(ii) and any regulations or other 
guidance thereunder.
    (29) Month. The term month means--
    (i) A calendar month as defined in paragraph (a)(8) of this 
section, or
    (ii) 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).
    (30) New employee. Under the look-back measurement method, 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 continuing employee 
under the look-back measurement method following a period for which no 
hours of service are earned, see the rehire and continuing employee 
rules at Sec.  54.4980H-3(d)(6). Under the monthly measurement method, 
the term new employee means an employee who either has not previously 
been employed by the applicable large employer or has previously been 
employed by the applicable large employer but is treated as a new 
employee under the rehire and continuing employee rules at Sec.  
54.4980H-3(c)(4).
    (31) 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. For the treatment of an 
ongoing employee as a new employee or continuing employee following a 
period for which no hours

[[Page 8581]]

of service are earned, see the rehire and continuing employee rules at 
Sec.  54.4980H-3(d)(6).
    (32) Part-time employee. The term part-time employee means a new 
employee who the applicable large employer member reasonably expects to 
be employed on average less than 30 hours of service per week during 
the initial measurement period, based on the facts and circumstances at 
the employee's start date. Whether an employer's determination that a 
new employee is a part-time employee is reasonable is based on the 
facts and circumstances at the employee's start date. Factors to 
consider in determining a new employee's full-time employee status are 
set forth in Sec.  54.4980H-3(d)(2)(ii).
    (33) 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.
    (34) Person. The term person has the same meaning as provided in 
section 7701(a)(1) and the regulations thereunder.
    (35) Plan year. A 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, 2015, must end on October 14, 2016). 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 purpose. 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.
    (36) Predecessor employer. [Reserved]
    (37) 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)).
    (38) Seasonal employee. The term seasonal employee means an 
employee who is hired into a position for which the customary annual 
employment is six months or less.
    (39) 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)).
    (40) 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.
    (41) Section 4980H(a) applicable payment amount. The term section 
4980H(a) applicable payment amount means, with respect to any calendar 
month, 1/12 of $2,000, adjusted for inflation in accordance with 
section 4980H(c)(5) and any applicable guidance thereunder.
    (42) Section 4980H(b) applicable payment amount. The term section 
4980H(b) applicable payment amount means, with respect to any calendar 
month, 1/12 of $3,000, adjusted for inflation in accordance with 
section 4980H(c)(5) and any applicable guidance thereunder.
    (43) Self-only coverage. The term self-only coverage means health 
insurance coverage provided to only one individual, generally the 
employee.
    (44) Special unpaid leave. The term special unpaid leave means--
    (i) Unpaid leave that is subject to the Family and Medical Leave 
Act of 1993 (FMLA), Public Law 103-3, 29 U.S.C. 2601 et seq.;
    (ii) 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
    (iii) Unpaid leave on account of jury duty.
    (45) Stability period. The term stability period means a period 
selected by an applicable large employer member that immediately 
follows, and is associated with, a standard measurement period or an 
initial measurement period (and, if elected by the employer, the 
administrative period associated with that standard measurement period 
or initial measurement period), and is used by the applicable large 
employer member as part of the look-back measurement method in Sec.  
54.4980H-3(d).
    (46) Standard measurement period. The term standard measurement 
period means a period of at least three but not more than 12 
consecutive months that is used by an applicable large employer member 
as part of the look-back measurement method in Sec.  54.4980H-3(d). See 
Sec.  54.4980H-3(d)(1)(ii) for rules on the use of payroll periods that 
include the beginning and end dates of the measurement period.
    (47) 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 rehire and continuing employee rules at Sec.  
54.4980H-3(c)(4) and Sec.  54.4980H-3(d)(6).
    (48) United States. The term United States means United States as 
defined in section 7701(a)(9).
    (49) Variable hour employee-(i) In general. 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.
    (ii) Factors--(A) In general. Factors to consider in determining 
whether it can be determined that the employee is reasonably expected 
to be (or reasonably expected not to be) employed on average at least 
30 hours of service per week during the initial measurement period 
include, but are not limited to, whether the employee is replacing an 
employee who was a full-time employee or a variable hour employee, the 
extent to which the hours of service of employees in the same or 
comparable positions have actually varied above and below an average of 
30 hours of service per week during recent measurement periods, and 
whether the

[[Page 8582]]

job was advertised, or otherwise communicated to the new employee or 
otherwise documented (for example, through a contract or job 
description) as requiring hours of service that would average at least 
30 hours of service per week, less than 30 hours of service per week, 
or may vary above and below an average of 30 hours of service per week. 
These factors are only relevant for a particular new employee if the 
employer has no reason to anticipate that the facts and circumstances 
related to that new employee will be different. In all cases, no single 
factor is determinative. For purposes of determining whether an 
employee is a variable hour employee, 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.
    (B) Additional factors for an employee hired by an employer for 
temporary placement at an unrelated entity. In the case of an 
individual who, under all the facts and circumstances, is the employee 
of an entity (referred to solely for purposes of this paragraph (a)(49) 
as a ``temporary staffing firm'') that hired such individual for 
temporary placement at an unrelated entity that is not the common law 
employer, additional factors to consider to determine whether the 
employee is reasonably expected to be (or reasonably expected not to 
be) employed by the temporary staffing firm on average at least 30 
hours of service per week during the initial measurement period 
include, but are not limited to, whether other employees in the same 
position of employment with the temporary staffing firm, as part of 
their continuing employment, retain the right to reject temporary 
placements that the temporary staffing firm offers the employee; 
typically have periods during which no offer of temporary placement is 
made; typically are offered temporary placements for differing periods 
of time; and typically are offered temporary placements that do not 
extend beyond 13 weeks.
    (C) Educational organizations. An employer that is an educational 
organization cannot take into account the potential for, or likelihood 
of, an employment break period in determining its expectation of future 
hours of service.
    (iii) Application only for look-back measurement method. The term 
variable hour employee is used as a category of employees under the 
look-back measurement method and is not relevant to the monthly 
measurement method.
    (50) 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, 2014.


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.
    (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. In the case of an 
employer that was not in existence on any business day during the 
preceding calendar year, if the employer reasonably expects that the 
sum of its full-time employees and FTEs for the current calendar year 
will exceed 50 for 120 days or less during the calendar year, and that 
the employees in excess of 50 who will be employed during that period 
of no more than 120 days will be seasonal workers, 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 the employer 
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. An employer is treated as not having been in 
existence throughout the prior calendar year only if the employer was 
not in existence on any business day in the prior calendar year. See 
paragraph (b)(2) of this section for the application of the seasonal 
worker exception to employers not in existence in the preceding 
calendar year.
    (4) Special rules for government entities, churches, and 
conventions and associations of churches. [Reserved]
    (5) Transition rule for an employer's first year as an applicable 
large employer. With respect to an employee who was not offered 
coverage by the employer at any point during the prior calendar year, 
if the applicable large employer offers coverage to the employee on or 
before April 1 of the first calendar year for which the employer is an 
applicable large employer, the employer will not be subject to an 
assessable payment under section 4980H by reason of its failure to 
offer coverage to the employee for January through March of that year, 
provided that this relief applies only with respect to potential 
liability under section 4980H(b) (for January through March of the 
first calendar year for which the employer is an applicable large 
employer) if the coverage offered by April 1 provides minimum value. If 
the employer does not offer coverage to the employee by April 1, the 
employer may be subject to a section 4980H(a) assessable payment with 
respect January through March of the first calendar year for which the 
employer is an applicable large employer in addition to any later 
calendar months for which coverage was not offered. If the employer 
offers coverage to the employee by April 1 that does not provided 
minimum value, the employer may be subject to a section 4980H(b) 
assessable payment with respect to the employee for January through 
March of the first calendar year for which the employer is an 
applicable large employer in addition to any later calendar months for 
which coverage does not provide minimum value or is not affordable. 
This rule applies only

[[Page 8583]]

during the first year that an employer is an applicable large employer 
(and would not apply if, for example, the employer falls below the 50 
full-time employee (plus FTE) threshold for a subsequent calendar year 
and then increases employment and becomes an applicable large employer 
again).
    (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 is 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; an employer may round the number of FTEs for 
each calendar month to the nearest one hundredth.
    (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 Example 2 through Example 6 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 all of 2015 and 2016, Corporation Z owns 100 percent of 
all classes of stock of Corporation Y and Corporation X. Corporation 
Z has no employees at any time in 2015. For every calendar month in 
2015, Corporation Y has 40 full-time employees and Corporation X has 
60 full-time employees. Corporations Z, Y, and X are a controlled 
group of corporations under section 414(b).
    (ii) Conclusion. Because Corporations Z, Y and X have a combined 
total of 100 full-time employees during 2015, Corporations Z, Y, and 
X together are an applicable large employer for 2016. Each of 
Corporations Z, Y and X is an applicable large employer member for 
2016.
    Example 2 (Applicable large employer with FTEs). (i) Facts. 
During each calendar month of 2015, Employer W 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 calendar 
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 
calendar month. To determine the number of FTEs for each calendar 
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 calendar month (40 x 90 = 3,600, and 3,600 / 
120 = 30). Because Employer W has 50 full-time employees (the sum of 
20 full-time employees and 30 FTEs) during each calendar month in 
2015, and because the seasonal worker exception is not applicable, 
Employer W is an applicable large employer for 2016.
    Example 3 (Seasonal worker exception). (i) Facts. During 2015, 
Employer V has 40 full-time employees for the entire calendar year, 
none of whom are seasonal workers. In addition, Employer V also has 
80 seasonal workers who are full-time employees and who work for 
Employer V from September through December 2015. Employer V has no 
FTEs during 2015.
    (ii) Conclusion. Before applying the seasonal worker exception, 
Employer V 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 66.67 full-time 
employees for the year. However, Employer V's workforce 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 described in paragraph (b)(2) of this section 
Employer V is not considered to employ more than 50 full-time 
employees, Employer V is not an applicable large employer for 2016.
    Example 4 (Seasonal workers and other FTEs).  (i) Facts. Same 
facts as Example 3, except that Employer V has 20 FTEs in August, 
some of whom are seasonal workers.
    (ii) Conclusion. The seasonal worker exception described 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 
exceeds 50 for more than 120 days during the calendar year. Because 
Employer V 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 described in paragraph (b)(2) of this 
section does not apply. Employer V averaged 68 full-time employees 
in 2015: [(40 x 7) + (60 x 1) + (120 x 4)] / 12 = 68.33, and 
accordingly, Employer V is an applicable large employer for calendar 
year 2016.
    Example 5 (New employer). (i) Facts. Corporation S is 
incorporated on January 1, 2016. On January 1, 2016, Corporation S 
has three employees. However, prior to incorporation, Corporation 
S's owners purchased a factory intended to open within two calendar 
months of incorporation and to employ approximately 100 full-time 
employees. By March 15, 2016, Corporation S has more than 75 full-
time employees.
    (ii) Conclusion. Because Corporation S can reasonably be 
expected to employ on average at least 50 full-time employees on 
business days during 2016, and actually employs an average of at 
least 50 full-time employees on business days during 2016, 
Corporation S is an applicable large employer (and an applicable 
large employer member) for calendar year 2016.
    Example 6 (First year as applicable large employer).  (i) Facts. 
As of January 1, 2015, Employer R has been in existence for several 
years and did not average 50 or more full-time employees (including 
FTEs) on business days during 2014. Employer R averages 50 or more 
full-time employees on business days during 2015, so that for 2016 
Employer R is an applicable large employer, for the first time. For 
all the calendar months of 2016, Employer R has the same 60 full-
time employees. Employer R offered 20 of those full-time employees 
healthcare coverage during 2015, and offered those same employees 
coverage providing minimum value for 2016. With respect to the 40 
full-time employees who were not offered coverage during 2015, 
Employer R offers coverage providing minimum value for calendar 
months April 2016 through December 2016.
    (ii) Conclusion. For the 40 full-time employees not offered 
coverage during 2015 and offered coverage providing minimum value 
for the calendar months April 2016 through December 2016, the 
failure to offer coverage during the calendar months January 2016 
through March 2016 will not result in an assessable payment under 
section 4980H with respect to those employees for those three 
calendar months. For those same 40 full-time employees, the offer of 
coverage during the calendar months April 2016 through December 2016 
may result in an assessable payment under section 4980H(b) with 
respect to any employee for any calendar month for which the offer 
is not affordable and for which Employer R has received a Section 
1411 Certification. For the other 20 full-time employees, the offer 
of coverage during 2016 may result in an assessable payment under 
section 4980H(b) for any calendar month if the offer is not 
affordable and Employer R has received a Section 1411 Certification 
with respect to the employee who received the offer of coverage. For 
all calendar months of 2016, Employer R will not be subject to an 
assessable payment under section 4980H(a).

    (e) Additional guidance. With respect to an employer's status as an 
applicable large employer, the Commissioner may prescribe additional 
guidance of general applicability, published in the Internal Revenue 
Bulletin (see Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (f) Effective/applicability date. This section is applicable for 
periods after December 31, 2014.

[[Page 8584]]

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 purposes of 
section 4980H. These regulations provide two methods for determining 
full-time employee status--the monthly measurement method, set forth in 
paragraph (c) of this section, and the look-back measurement method, 
set forth in paragraph (d) of this section. The monthly measurement 
method applies for purposes of determining and calculating liability 
under section 4980H(a) and (b), as well as, with respect to paragraph 
(c)(1) of this section, determination of applicable large employer 
status (except with respect to the weekly rule under the monthly 
measurement method). The look-back measurement method applies 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)(21) for the 
definition of full-time employee. The rules set forth in this section 
prescribe the minimum standards for determining status as a full-time 
employee for purposes of section 4980H; treatment of additional 
employees as full-time employees for other purposes does not affect 
section 4980H liability if those employees are not full-time employees 
under the look-back measurement method or the monthly measurement 
method.
    (b) Hours of service--(1) In general. The following rules on the 
calculation of hours of service apply for purposes of applying both the 
look-back measurement method and the monthly measurement method.
    (2) Hourly employees calculation. Under the look-back measurement 
method and the monthly measurement method, 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.
    (3) Non-hourly employees calculation--(i) In general. Except as 
otherwise provided, under the look-back measurement method and the 
monthly measurement method, 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 which the 
employee would be required to be credited with at least one hour of 
service in accordance with paragraph (b)(2) of this section; or
    (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)(2) of this section.
    (ii) Change in method. An employer must use one of the three 
methods in paragraph (b)(3)(i) 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 categories of non-hourly employees, 
provided the categories 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 categories of non-
hourly employees, provided that in each case the categories are 
reasonable and consistently applied by the applicable large employer 
member. An employer may change the method of calculating the hours of 
service of non-hourly employees (or of one or more categories of non-
hourly employees) for each calendar year.
    (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 a full-time 
employee, or if the result is to understate the hours of service of a 
substantial number of employees (even if no particular employee's hours 
of service are understated substantially and even if the understatement 
would not cause the employee to not be treated as a full-time 
employee). For example, as to the former, 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.
    (c) Monthly measurement method--(1) In general. Under the monthly 
measurement method, an applicable large employer member determines each 
employee's status as a full-time employee by counting the employee's 
hours of service for each calendar month. See Sec.  54.4980H-1(a)(21) 
for the definition of full-time employee. This paragraph (c)(1) (except 
with respect to the weekly rule) applies for purposes of the 
determination of status as an applicable large employer; paragraphs 
(c)(2) through (4) of this section do not apply for purposes of the 
determination of status as an applicable large employer. For rules 
regarding the use of the look-back measurement method and the monthly 
measurement method for different categories of employees, see paragraph 
(e) of this section.
    (2) Employee first otherwise eligible for an offer of coverage. The 
rule in this paragraph (c)(2) applies with respect to an employee who, 
in a calendar month, first becomes otherwise eligible to be offered 
coverage under a group health plan of an employer using the monthly 
measurement method with respect to that employee. For purposes of this 
paragraph (c)(2), an employee is otherwise eligible to be offered 
coverage under a group health plan for a calendar month if, pursuant to 
the terms of the plan as in effect for that calendar month, the 
employee meets all conditions to be offered coverage under the plan for 
that calendar month, other than the completion of a waiting period, 
within the meaning of Sec.  54.9801-2, and an employee is first 
otherwise eligible if the employee has not previously been eligible or 
otherwise eligible for an offer of coverage under a group health plan 
of the employer during the employee's period of employment. An employer 
is not subject to an assessable payment under section 4980H(a) with 
respect to an employee for each calendar month during the period of 
three full calendar months beginning with the first full calendar month 
in which the employee is otherwise eligible for an offer of coverage 
under a group health plan of the employer, provided that the employee 
is offered coverage no later than the first day of the first calendar 
month immediately following the three-month period if the employee is 
still employed on that day. If the coverage for which the employee is 
otherwise eligible during the three-month period, and which the 
employee actually is offered on the day following that three-month 
period if still employed, provides minimum value, the employer also 
will not be subject to an assessable payment under section 4980H(b) 
with respect to that employee for the three-month period. This rule 
cannot apply more

[[Page 8585]]

than once per period of employment of an employee. If an employee 
terminates employment and returns under circumstances that would 
constitute a rehire as set forth in paragraph (c)(4) of this section, 
the rule in this paragraph (c)(2) may apply again.
    (3) Use of weekly periods. With respect to a category of employees 
for whom an employer uses the monthly measurement method, an employer 
may determine full-time employee status for a calendar month based on 
hours of service over a period that:
    (i) Begins on the first day of the week that includes the first day 
of the calendar month, provided that the period over which hours of 
service are measured does not include the week in which falls the last 
day of the calendar month (unless that week ends with the last day of 
the calendar month, in which case it is included); or
    (ii) begins on the first day of the week immediately subsequent to 
the week that includes the first day of the calendar month (unless the 
week begins on the first day of the calendar month, in which case it is 
included), provided the period over which hours of service are measured 
includes the week in which falls the last day of the calendar month.
    (4) Employees rehired after termination of employment or resuming 
service after other absence--(i) Treatment as a new employee after a 
period of absence for employees of employers other than educational 
organizations. Except as provided in paragraph (c)(4)(ii) of this 
section (related to rules for employers that are educational 
organizations), 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 individual 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 13 consecutive weeks immediately preceding the 
resumption of services. The rule set forth in this paragraph (c)(4)(i) 
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 (for example, an employee on 
leave) or a terminated employee for some or all of the period during 
which no hours of service are credited.
    (ii) Treatment as a new employee after a period of absence for 
employees of educational organizations. With respect to an employer 
that is an educational organization, 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 individual 
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. The rule set forth in this 
paragraph (c)(4)(ii) 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 (for 
example, an employee on leave) or a terminated employee for some or all 
of the period during which no hours of service are credited.
    (iii) Averaging method for special unpaid leave and employment 
break periods. The averaging method for periods of special unpaid leave 
and employment break periods does not apply under the monthly 
measurement method, regardless of whether the employer is (or is not) 
an educational organization.
    (iv) Treatment of continuing employee. The rule set forth in 
paragraph (c)(2) of this section applies to an employee treated as a 
continuing employee in the same way that it applies to an employee who 
has not experienced a period with no hours of service. A continuing 
employee treated as a full-time employee is 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. For this purpose, 
offering coverage by no later than the first day of the calendar month 
following resumption of services is deemed to be as soon as 
administratively practicable.
    (v) Rule of parity. For purposes of determining the period after 
which an employee may be treated as having terminated employment and 
having been rehired, an applicable large employer may choose a period, 
measured in weeks, of at least four consecutive weeks during which the 
employee was not credited with any hours of service that exceeds the 
number of weeks of that employee's period of employment with the 
applicable large employer immediately preceding the period that is 
shorter than 13 weeks (for an employee of an educational organization 
employer, a period that is shorter than 26 weeks).
    (vi) International transfers. An employer may treat an employee as 
having terminated employment if the employee transfers to a position at 
the same applicable large employer (including a different applicable 
large employer member that is part of the same applicable large 
employer) if the position is anticipated to continue indefinitely or 
for at least 12 months and if substantially all of the compensation 
will constitute income from sources without the United States (within 
the meaning of sections 861 through 863 and the regulations 
thereunder). With respect to an employee transferring from a position 
that was anticipated to continue indefinitely or for at least 12 months 
and in which substantially all of the compensation for the hours of 
service constitutes income from sources without the United States 
(within the meaning of sections 861 through 863 and the regulations 
thereunder) to a position at the same applicable large employer 
(including a different applicable large employer member that is part of 
the same applicable large employer) with respect to which substantially 
all of the compensation will constitute U.S. source income, the 
employer may treat that employee as a new hire to the extent consistent 
with the rules related to rehired employees as set forth in paragraph 
(c)(4) of this section.
    (5) Examples. The following examples illustrate the rules of 
paragraphs (c)(1) through (4) of this section. In each example, the 
employer is an applicable large employer with 200 full-time employees 
(including FTEs) that uses the monthly measurement method to identify 
full-time employees and offers coverage only to employees who are full-
time employees (and their dependents).

    Example 1 (Monthly measurement method--employee first otherwise 
eligible for an offer of coverage). (i) Facts. Employer Z uses the 
monthly measurement method. Employer Z hires Employee A on January 
1, 2016. For each calendar month in 2016, Employee A averages 20 
hours of service per week and is not eligible (or otherwise 
eligible) for an offer of coverage under the group health plan of 
Employer Z. Effective

[[Page 8586]]

January 1, 2017, Employee A is promoted to a position that is 
eligible for an offer of coverage under a group health plan of 
Employer Z, following completion of a 90-day waiting period. For 
January 2017 through March 2017, Employee A meets all of the 
conditions for eligibility under the group health plan, other than 
completion of the waiting period. The coverage that would have been 
offered to Employee A under the terms of the plan, but for the 
waiting period, during those three months would have provided 
minimum value. Effective April 1, 2017, Employer Z offers Employee A 
coverage that provides minimum value. Employee A averages 40 hours 
of service per week for each calendar month in 2017.
    (ii) Conclusion. Because Employer Z offers minimum value 
coverage to Employee A no later than the first day following the 
period of three full calendar months beginning with the first full 
calendar month in which Employee A is otherwise eligible for an 
offer of coverage under a group health plan of Employer Z, Employer 
Z is not subject to an assessable payment for January 2017 through 
March 2017 under section 4980H by reason of its failure to offer 
coverage to Employee A during those months. For calendar months 
after March 2017, an offer of minimum value coverage may result in 
an assessable payment under section 4980H(b) with respect to 
Employee A for any month for which the offer is not affordable and 
for which Employer Z has received a Section 1411 Certification. 
Employer Z is not subject to an assessable payment under section 
4980H by reason of its failure to offer coverage to Employee A 
during each month of 2016 because for each month of 2016, Employee A 
was not a full-time employee.
    Example 2 (Rehire rules under monthly measurement method for 
employers that are not educational organizations). (i) Facts. Same 
as Example 1, except that Employee A has zero hours of service 
during a nine week period of unpaid leave (that constitutes special 
unpaid leave) beginning on June 25, 2017, and ending on August 26, 
2017. As a result of the nine week period during which Employee A 
has zero hours of service, Employee A averages less than 30 hours of 
service per week for July 2017 and August 2017. Employee A averages 
more than 30 hours of service per week for each month between and 
including September 2017 through December 2017. Employer Z does not 
use the rule of parity, set forth in paragraph (c)(4)(v) of this 
section, and Employer Z is not an educational organization.
    (ii) Conclusion. Because Employee A resumes providing services 
for Employer Z after a period during which the employee was not 
credited with any hours of service of less than 13 consecutive 
weeks, Employer Z may not treat Employee A as having terminated 
employment and having been rehired. Therefore, Employer Z may not 
treat Employee A as a new employee upon the resumption of services, 
and, accordingly, Employer Z may not again apply the rule set forth 
in paragraph (c)(2) of this section. Although the nine consecutive 
weeks of zero hours of service constitute special unpaid leave, the 
averaging method for periods of special unpaid leave does not apply 
under the monthly measurement method. Therefore, Employer Z may 
treat Employee A as a non-full-time employee for July 2017 and 
August 2017.
    Example 3 (Use of weekly rule). (i) Facts. Employer Y uses the 
monthly measurement method in combination with the weekly rule for 
purposes of determining whether an employee is a full-time employee 
for a particular calendar month. For purposes of applying the weekly 
rule, Employer Y uses the period of Sunday through Saturday as a 
week and includes the week that includes the first day of a calendar 
month and excludes the week that includes the last day of a calendar 
month (except in any case in which the last day of the calendar 
month occurs on a Saturday). Employer Y measures hours of service 
for the five weeks from Sunday, December 27, 2015, through Saturday, 
January 30, 2016, to determine an employee's full-time employee 
status for January 2016, for the four weeks from Sunday, January 31, 
2016, through Saturday, February 27, 2016, to determine an 
employee's status for February 2016, and the four weeks from Sunday, 
February 28, 2016, through Saturday, March 26, 2016, to determine an 
employee's status for March 2016. For January 2016, Employer Y 
treats an employee as a full-time employee if the employee has at 
least 150 hours of service (30 hours per week x 5 weeks). For 
February 2016 and March 2016, Employer Y treats an employee as a 
full-time employee if the employee has at least 120 hours of service 
(30 hours per week x 4 weeks).
    (ii) Conclusion. Employer Y has correctly applied the weekly 
rule as part of the monthly measurement method for determining each 
employee's status as a full-time employee for the months January, 
February, and March 2016.

    (d) 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 employee 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 (d)(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 
of service per week during the standard measurement period, then the 
applicable large employer member must treat 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 
of 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

[[Page 8587]]

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. Different applicable large 
employer members of the same applicable large employer may use 
measurement periods and stability periods that differ either in length 
or in their starting or ending dates. In addition, 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--
    (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, and
    (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 period 
during which coverage is not available, 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 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 (d)(1)(v) of this section.
    (vii) Change in employment status. Except as provided in paragraph 
(f)(2) of this section, if an ongoing employee experiences a change in 
employment status 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 experiences a change in employment 
status 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 experiences a change 
in employment status 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 
(d)(1) of this section:
    (A) Facts. Employer Z is an applicable large employer member and 
computes hours of service following the rules in this paragraph (d)(1). 
Employer Z 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 Z's group health 
plan, only employees classified as full-time employees using the look-
back measurement method are eligible for coverage. Employer Z 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 Z 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 
averaged less than 30 hours of service per week during the standard 
measurement period that begins October 15, 2015, and ends October 14, 
2016.
    (B) 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 was not a full-time employee based on hours of service during this 
standard measurement period, Employee B is not 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 Z complies with the standards of 
paragraph (d)(1) of this section because the standard measurement 
period is no longer than 12 months, the stability period for ongoing 
employees who are full-time employees based on hours of service during 
the standard measurement period is not shorter than the standard 
measurement period, the

[[Page 8588]]

stability period for ongoing employees who are not full-time employees 
based on hours of service 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, new non-seasonal and new non-part-time 
employees--(i) In general. For a new employee who is reasonably 
expected at the employee's start date to be a full-time employee (and 
is not a seasonal employee), an applicable large employer member 
determines such employee's status as a full-time employee based on the 
employee's hours of service for each calendar month. If the employee's 
hours of service for the calendar month equal or exceed an average of 
30 hours of service per week, the employee is a full-time employee for 
that calendar month. Once a new employee who is reasonably expected at 
the employee's start date to be a full-time employee (and is not a 
seasonal employee) becomes an ongoing employee, the rules set forth in 
paragraph (d)(1) of this section apply for determining full-time 
employee status.
    (ii) Factors for determining full-time employee status. Whether an 
employer's determination that a new employee (who is not a seasonal 
employee) is a full-time employee or is not a full-time employee is 
reasonable is based on the facts and circumstances at the employee's 
start date. Factors to consider in determining whether a new employee 
who is not a seasonal employee is reasonably expected at the employee's 
start date to be a full-time employee include, but are not limited to, 
whether the employee is replacing an employee who was (or was not) a 
full-time employee, the extent to which hours of service of ongoing 
employees in the same or comparable positions have varied above and 
below an average of 30 hours of service per week during recent 
measurement periods, and whether the job was advertised, or otherwise 
communicated to the new hire or otherwise documented (for example, 
through a contract or job description), as requiring hours of service 
that would average 30 (or more) hours of service per week or less than 
30 hours of service per week. In all cases, no single factor is 
determinative. An educational organization employer cannot take into 
account the potential for, or likelihood of, an employment break period 
in determining its expectation of future hours of service.
    (iii) Application of section 4980H to initial full three calendar 
months of employment. Notwithstanding paragraph (d)(2)(i) of this 
section, with respect to an employee who is reasonably expected at his 
or her start date to be a full-time employee (and is not a seasonal 
employee), the employer will not be subject to an assessable payment 
under section 4980H(a) for any calendar month of the three-month period 
beginning with the first day of the first full calendar month of 
employment if, for the calendar month, the employee is otherwise 
eligible for an offer of coverage under a group health plan of the 
employer, provided that the employee is offered coverage by the 
employer no later than the first day of the fourth full calendar month 
of employment if the employee is still employed on that day. If the 
offer of coverage for which the employee is otherwise eligible during 
the first three full calendar months of employment, and which the 
employee actually is offered by the first day of the fourth month if 
still employed, provides minimum value, the employer also will not be 
subject to an assessable payment under section 4980H(b) with respect to 
that employee for the first three full calendar months of employment. 
For purposes of this paragraph (d)(2)(iii), an employee is otherwise 
eligible to be offered coverage under a group health plan for a 
calendar month if, pursuant to the terms of the plan as in effect for 
that calendar month, the employee meets all conditions to be offered 
coverage under the plan for that calendar month, other than the 
completion of a waiting period, within the meaning of Sec.  54.9801-2.
    (3) New variable hour employees, new seasonal employees, and new 
part-time employees--(i) In general. For new variable hour employees, 
new seasonal employees, and new part-time employees, applicable large 
employer members are permitted to determine whether the new employee is 
a full-time employee using an initial measurement period of no less 
than three consecutive months and no more than 12 consecutive months 
(as selected by the applicable large employer member) that begins on 
the employee's start date or on any date up to and including the first 
day of the first calendar month following the employee's start date (or 
on the first day of the first payroll period starting on or after the 
employee's start date, if later, as set forth in paragraph (d)(3)(ii) 
of this section). 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) Use of payroll periods. An applicable large employer member 
may apply the payroll period rule set forth in paragraph (d)(1)(ii) of 
this section for purposes of determining an initial measurement period, 
provided that the initial measurement period must begin on the start 
date or any date during the period beginning with the employee's start 
date and ending with the later of the first day of the first calendar 
month following the employee's start date and the first day of the 
first payroll period that starts after the employee's start date. As 
set forth in paragraph (d)(1)(ii) of this section, the use of payroll 
periods for purposes of determining the initial measurement period 
applies for payroll periods that are one week, two weeks, or semi-
monthly in duration.
    (iii) Employees determined to be employed on average at least 30 
hours of service per week. If a new variable hour employee, new 
seasonal employee, or new part-time employee has on average at least 30 
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. The stability period must begin immediately after the end of 
the measurement period and any applicable administrative period. With 
respect to an employee who has on average at least 30 hours of service 
per week during the initial measurement period, the employer will not 
be subject to an assessable payment under section 4980H(a) for any 
calendar month during the initial measurement period and any associated 
administrative period if, for the calendar month, the employee is 
otherwise eligible for an offer of coverage under a group health plan 
of the employer, provided that the employee is offered coverage by the 
employer no later than the first day of the associated stability period 
if the employee is still employed on that day. If the offer of coverage 
for which the employee is otherwise eligible during the initial 
measurement period, and which the employee actually is offered by the 
first day of the stability period if still employed, provides minimum 
value, the employer also will not be subject to an assessable payment 
under section 4980H(b) with respect to that employee during the

[[Page 8589]]

initial measurement period and any associated administrative period. 
For purposes of this paragraph (d)(3)(iii), an employee is otherwise 
eligible to be offered coverage under a group health plan for a month 
if, pursuant to the terms of the plan as in effect for that calendar 
month, the employee meets all conditions to be offered coverage under 
the plan for that month, other than the completion of a waiting period, 
within the meaning of Sec.  54.9801-2.
    (iv) Employees determined not to be employed on average at least 30 
hours of service per week. If a new variable hour employee, new 
seasonal employee, or new part-time employee does not have on average 
at least 30 hours of service per week during the initial measurement 
period, the applicable large employer member may treat the employee as 
not a full-time employee during the stability period that follows the 
initial measurement period. Except as provided in paragraph (d)(4)(iv) 
of this section, the stability period for such employees must not be 
more than one month longer than the initial measurement period and must 
not exceed the remainder of the first entire standard measurement 
period (plus any associated administrative period) for which a variable 
hour employee, seasonal employee, or part-time employee has been 
employed. The stability period must begin immediately after the end of 
the measurement period and any applicable administrative period.
    (v) 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, with respect to a new variable hour employee, new 
seasonal employee, or new part-time employee, 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 (d)(1)(v) of this 
section.
    (vi) Optional administrative period--(A) In general. Subject to the 
limits in paragraph (d)(3)(vi)(B) of this section, an applicable large 
employer member may 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, new seasonal 
employee, or new part-time 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 
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 (d)(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, new 
seasonal employee, or new part-time 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 is a full-time employee based on hours of service 
during the initial measurement period must not exceed one month.
    (vii) Change in employment status during the initial measurement 
period--(A) In general. If a new variable hour employee, new seasonal 
employee, or new part-time employee experiences a change in employment 
status before the end of the initial measurement period such 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 (or, if applicable, would not 
have been a seasonal employee and would have been expected to be 
employed on average at least 30 hours of service per week), the rules 
set forth in the remainder of this paragraph (d)(3)(vii) apply. With 
respect to an employee described in this paragraph (d)(3)(vii) and 
subject to the rules in the next sentence, the employer will not be 
subject to an assessable payment under section 4980H for the period 
before the first day of the fourth full calendar month following the 
change in employment status (or, if earlier and the employee averages 
30 or more 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)). An employer 
will not be subject to an assessable payment under section 4980H(a) 
with respect to an employee described in this paragraph (d)(3)(vii) for 
any calendar month during the period described in the prior sentence 
if, for the calendar month, the employee is otherwise eligible for an 
offer of coverage under a group health plan of the employer, provided 
that the employee is offered coverage by the employer no later than the 
end of the period described in the prior sentence if the employee is 
still employed on that date; if the offer of coverage for which the 
employee is otherwise eligible during the period described in the prior 
sentence, and which the employee is actually offered by the first day 
after the end of that period if still employed, provides minimum value, 
the employer also will not be subject to an assessable payment under 
section 4980H(b) with respect to that employee during that period. For 
purposes of this paragraph (d)(3)(vii), an employee is otherwise 
eligible to be offered coverage under a group health plan for a 
calendar month if, pursuant to the terms of the plan as in effect for 
that calendar month, the employee meets all conditions to be offered 
coverage under the plan for that calendar month, other than the 
completion of a waiting period, within the meaning of Sec.  54.9801-2.
    (B) Example. The following example illustrates the provisions of 
paragraph (d)(3)(vii) of this section. In the following example, the 
applicable large employer member has 200 full-time employees and 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

[[Page 8590]]

section 36B(c)(2)(C)(i) (or is treated as affordable under one of the 
affordability safe harbors described in Sec.  54.4980H-5) and provides 
minimum value.

    Example (Change in employment status from variable hour employee 
to full-time employee).  (i) Facts. For new variable hour employees, 
Employer Z 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. For new variable hour employees, Employer Z offers coverage 
no later than the first day of the fourteenth month after the start 
date if an employee averages 30 or more hours of service per week 
during the initial measurement period. Employer Z hires Employee A 
on May 10, 2015. Employee 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 A's May 10, 2015, start 
date, Employee A is a variable hour employee. On September 15, 2015, 
Employer Z promotes Employee A to a position that can reasonably be 
expected to average at least 30 hours of service per week. For 
October 2015 through December 2015, Employee A is otherwise eligible 
for an offer of coverage that provides minimum value, and, on 
January 1, 2016, Employee A is offered coverage by the employer that 
provides minimum value.
    (ii) Conclusion. Employer Z will not be subject to an assessable 
payment under section 4980H(a) with respect to Employee A for 
October 2015, November 2015, or December 2015, because for each of 
those months Employee A is otherwise eligible for an offer of 
coverage and because Employee A is offered coverage by January 1, 
2016 (the date that is the earlier of the first day of the fourth 
calendar month following the change in employment status (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)). Because the coverage offered on January 1, 2016, 
provides minimum value, Employer Z also will not be subject to an 
assessable payment under section 4980H(b) with respect to Employee A 
for October 2015, November 2015, or December 2015.

    (4) Transition from new variable hour employee, new seasonal 
employee, or new part-time employee to ongoing employee--(i) In 
general. Once a new variable hour employee, new seasonal employee, or 
new part-time employee has been employed for an entire standard 
measurement period, the applicable large employer member 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 employee whose 
start date is April 12 for full-time employee status first based on the 
initial measurement period (April 12 of the year including the start 
date through April 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 
(d)(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 (d)(1) of this section.
    (iv) Treatment during periods between stability periods. If there 
is a period between the end of the stability period associated with the 
initial measurement period and the beginning of the stability period 
associated with the first full standard measurement period during which 
an employee is employed, the treatment as a full-time employee or not a 
full-time employee that applies during the stability period associated 
with the initial measurement period continues to apply until the 
beginning of the stability period associated with the first full 
standard measurement period during which the employee is employed.
    (5) Examples. The following examples illustrate the look-back 
measurement methods described in paragraphs (d)(1), (d)(3) and (d)(4) 
of this section. In all of the following examples, the applicable large 
employer member has 200 full-time employees and 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. 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 
having an average of at least 30 hours of service per week during the 
prior standard measurement period.) 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 1 and November 
1, with six-month stability periods associated with those standard 
measurement periods starting January 1 and July 1. In Example 12, 
Example 13, and Example 14, the employer is in the trade or business of 
providing temporary workers to numerous clients that are unrelated to 
the employer and to one another; the employer is the common law 
employer of the temporary workers based on all of the facts and 
circumstances; the employer offers health plan coverage only to full-
time employees (including temporary workers who are full-time 
employees) and their dependents; and the employer uses a 12-month 
initial measurement

[[Page 8591]]

period for new variable hour 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.

    Example 1 (12-Month initial measurement period followed by 1+ 
partial month administrative period).  (i) Facts. For new variable 
hour employees, Employer Z 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 Z hires Employee A on May 10, 
2015. Employee A's initial measurement period runs from May 10, 
2015, through May 9, 2016. Employee A has an average of 30 hours of 
service per week during this initial measurement period. Employer Z 
offers coverage that provides minimum value to Employee A for a 
stability period that runs from July 1, 2016, through June 30, 2017. 
For each calendar month during the period beginning with June 2015 
and ending with June 2016, Employee A is otherwise eligible for an 
offer of coverage with respect to the coverage that is offered to 
Employee A on July 1, 2016.
    (ii) Conclusion. Employer Z 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 A's start date. Accordingly, Employer Z complies with 
the standards for the initial measurement period and stability 
periods for a new variable hour employee. Employer Z will not be 
subject to an assessable payment under section 4980H(a) with respect 
to Employee A for any calendar month from June 2015 through June 
2016 because, for each month during that period, Employee A is 
otherwise eligible for an offer of coverage and because coverage is 
offered no later than the end of the initial measurement period plus 
the associated administrative period (July 1, 2016). Employer Z will 
not be subject to an assessable payment under section 4980H(b) with 
respect to Employee A for any calendar month from June 2015 through 
June 2016 because the coverage Employer Z offers to Employee A 
provides minimum value. Employer Z will not be subject to an 
assessable payment under section 4980H(a) or (b) with respect to 
Employee A for May 2015 because an applicable large employer member 
is not subject to an assessable payment under section 4980H with 
respect to an employee for the calendar month in which falls the 
employee's start date if the start date is on a date other than the 
first day of the calendar month. Employer Z must test Employee A 
again based on the period from October 15, 2015, through October 14, 
2016 (Employer Z's first standard measurement period that begins 
after Employee A'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 Z 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. Employee A's initial measurement period runs 
from May 10, 2015, through April 9, 2016. The administrative period 
associated with Employee A's initial measurement period ends on June 
30, 2016. Employee A has an average of 30 hours of service per week 
during this initial measurement period.
    (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 Z 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. Employee A's initial measurement period runs 
from June 1, 2015, through April 30, 2016. The administrative period 
associated with Employee A's initial measurement period ends on June 
30, 2016. Employee A has an average of 30 hours of service per week 
during this initial measurement period.
    (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 Z 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 Z hires Employee A on May 10, 2015. Employee A's 
initial measurement period runs from June 1, 2015, through May 31, 
2016. Employee A has an average of 30 hours of service per week 
during this initial measurement period. Employer Z offers coverage 
to Employee A for a stability period that runs from August 1, 2016, 
through July 31, 2017.
    (ii) Conclusion. Employer Z does not satisfy the standards for 
the look-back measurement method in paragraph (d)(3)(vi)(B) 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 A 
does not become effective until after the first day of the second 
calendar month following the first anniversary of Employee A's start 
date. Accordingly, Employer Z is potentially subject to an 
assessable payment under section 4980H for each full calendar month 
during the initial measurement period and associated administrative 
period.
    Example 5 (Continuous full-time employee).  (i) Facts. Same as 
Example 1; in addition, Employer Z tests Employee A again based on 
Employee A's hours of service from October 15, 2015, through October 
14, 2016 (Employer Z's first standard measurement period that begins 
after Employee A's start date), determines that Employee A has an 
average of 30 hours of service per week during that period, and 
offers Employee A coverage for July 1, 2017, through December 31, 
2017. (Employee A 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 A was determined to be a 
full-time employee.)
    (ii) Conclusion. Employer Z is not subject to any payment under 
section 4980H for any calendar month during 2017 with respect to 
Employee A.
    Example 6 (Initially full-time employee, becomes non-full-time 
employee).  (i) Facts. Same as Example 1; in addition, Employer Z 
tests Employee A again based on Employee A's hours of service from 
October 15, 2015, through October 14, 2016 (Employer Z's first 
standard measurement period that begins after Employee A's start 
date), and determines that Employee A has an average of 28 hours of 
service per week during that period. Employer Z continues to offer 
coverage to Employee A through June 30, 2017 (the end of the 
stability period based on the initial measurement period during 
which Employee A was determined to be a full-time employee), but 
does not offer coverage to Employee A for the period of July 1, 
2017, through December 31, 2017.
    (ii) Conclusion. Employer Z is not subject to any payment under 
section 4980H for any calendar month during 2017 with respect to 
Employee A.
    Example 7 (Initially non-full-time employee).  (i) Facts. Same 
as Example 1, except that Employee A has an average of 28 hours of 
service per week during the initial measurement period (May 10, 
2015, through May 9, 2016), and Employer Z does not offer coverage 
to Employee A for any calendar month in 2016.
    (ii) Conclusion. From Employee A's start date through the end of 
2016, Employer Z is not subject to any payment under section 4980H 
with respect to Employee A, because Employer Z complies with the 
standards for the measurement and stability periods for a new 
variable hour employee with respect to Employee A and because under 
those standards, Employee A is not a full-time employee for any 
month during 2016.
    Example 8 (Initially non-full-time employee, becomes full-time 
employee).  (i) Facts. Same as Example 7; in addition, Employer Z 
tests Employee A again based on Employee A's hours of service from 
October 15, 2015, through October 14, 2016 (Employer Z's first 
standard measurement period that begins after Employee A's start 
date), determines that Employee A has an average of 30 hours of 
service per week during this standard measurement period, and offers 
coverage to Employee A for 2017.
    (ii) Conclusion. Employer Z is not subject to any payment under 
section 4980H for any calendar month during 2017 with respect to 
Employee A.

[[Page 8592]]

    Example 9 (Initially full-time employee).  (i) Facts. For new 
variable hour employees, Employer Y 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 
Y hires Employee B on May 10, 2015. Employee B's initial measurement 
period runs from May 10, 2015, through November 9, 2015, during 
which Employee B has an average of 30 hours of service per week. 
Employer Y offers coverage that provides minimum value to Employee B 
for a stability period that runs from January 1, 2016, through June 
30, 2016. For each calendar month during the period from June 2015 
through December 2015, Employee B is otherwise eligible for an offer 
of coverage with respect to the coverage that is offered to Employee 
B on January 1, 2016.
    (ii) Conclusion. Employer Y 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 extend beyond the final day of 
the first calendar month beginning on or after the one-year 
anniversary of Employee B's start date. Employer Y complies with the 
standards for the measurement and stability periods for a new 
variable hour employee with respect to Employee B. Employer Y is not 
subject to an assessable payment under section 4980H(a) with respect 
to Employee B for any calendar month from June 2015 through December 
2015 because, for each month during that period, Employee B is 
otherwise eligible for an offer of coverage and because Employee B 
is offered coverage no later than the end of the initial measurement 
period plus the associated administrative period (January 1, 2016). 
Employer Y is not subject to an assessable payment under section 
4980H(b) with respect to Employee B for any calendar month from June 
2015 through December 2015 because the coverage Employer Y offers to 
Employee B no later than January 1, 2016, provides minimum value. 
Employer Y is not subject to an assessable payment under section 
4980H(a) or (b) with respect to Employee B for May 2015 because an 
applicable large employer member is not subject to an assessable 
payment under section 4980H with respect to an employee for the 
calendar month in which falls the employee's start date if the start 
date is on a date other than the first day of the calendar month. 
Employer Y must test Employee B again based on Employee B's hours of 
service during the period from November 1, 2015, through April 30, 
2016 (Employer Y's first standard measurement period that begins 
after Employee B's start date).
    Example 10 (Initially full-time employee, becomes non-full-time 
employee).  (i) Facts. Same as Example 9; in addition, Employer Y 
tests Employee B again based on Employee B's hours of service during 
the period from November 1, 2015, through April 30, 2016 (Employer 
Y's first standard measurement period that begins after Employee B's 
start date), during which period Employee B has an average of 28 
hours of service per week. Employer Y continues to offer coverage to 
Employee B through June 30, 2016 (the end of the initial stability 
period based on the initial measurement period during which Employee 
B has an average of 30 hours of service per week), but does not 
offer coverage to Employee B from July 1, 2016, through December 31, 
2016.
    (ii) Conclusion. Employer Y is not subject to any payment under 
section 4980H with respect to Employee B for any calendar month 
during 2016.
    Example 11 (Seasonal employee, 12-month initial measurement 
period; 1+ partial month administrative period).  (i) Facts. 
Employer X offers health plan coverage only to full-time employees 
(and their dependents). Employer X uses a 12-month initial 
measurement period for 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 X hires Employee C, a ski instructor, on November 15, 2015, 
with an anticipated season during which Employee C will work running 
through March 15, 2016. Employee C's initial measurement period runs 
from November 15, 2015, through November 14, 2016.
    (ii) Conclusion. Employer X determines that Employee C is a 
seasonal employee because Employee C is hired into a position for 
which the customary annual employment is six months or less. 
Accordingly, Employer X may treat Employee C as a seasonal employee 
during the initial measurement period.
    Example 12 (Variable hour employee; temporary staffing firm).  
(i) Facts. Employer W hires Employee D on January 1, 2015, in a 
position under which Employer W will offer assignments to Employee D 
to provide services in temporary placements at clients of Employer 
W, and employees of Employer W in the same position as Employee D, 
as part of their continuing employment, retain the right to reject 
an offer of placement. Employees of Employer W in the same position 
of employment as Employee D typically perform services for a 
particular client for 40 hours of service per week for a period of 
less than 13 weeks, and for each employee there are typically 
periods in a calendar year during which Employer W does not have an 
assignment to offer the employee. At the time Employee D is hired by 
Employer W, Employer W has no reason to anticipate that Employee D's 
position of employment will differ from the typical employee in the 
same position.
    (ii) Conclusion. Employer W cannot determine whether Employee D 
is reasonably expected to average at least 30 hours of service per 
week for the 12-month initial measurement period. Accordingly, 
Employer W may treat Employee D as a variable hour employee during 
the initial measurement period.
    Example 13 (Variable hour employee; temporary staffing firm).  
(i) Facts. Employer V hires Employee E on January 1, 2015, in a 
position under which Employer V will offer assignments to Employee E 
to provide services in temporary placements at clients of Employer 
V. Employees of Employer V in the same position of employment as 
Employee E typically are offered assignments of varying hours of 
service per week (so that some weeks of the assignment typically 
result in more than 30 hours of service per week and other weeks of 
the assignment typically result in less than 30 hours of service per 
week). Although a typical employee in the same position of 
employment as Employee E rarely fails to have an offer of an 
assignment for any period during the calendar year, employees of 
Employer V in the same position of employment, as part of their 
continuing employment, retain the right to reject an offer of 
placement, and typically refuse one or more offers of placement and 
do not perform services for periods ranging from four to twelve 
weeks during a calendar year. At the time Employee E is hired by 
Employer V, Employer V has no reason to anticipate that Employee E's 
position of employment will differ from the typical employee in the 
same position.
    (ii) Conclusion. Employer V cannot determine whether Employee E 
is reasonably expected to average at least 30 hours of service per 
week for the 12-month initial measurement period. Accordingly, 
Employer V may treat Employee E as a variable hour employee during 
the initial measurement period.
    Example 14 (Variable hour employee; temporary staffing firm).  
(i) Facts. Employer T hires Employee F on January 1, 2015, in a 
position under which Employer T will offer assignments to Employee F 
to provide services in temporary placements at clients of Employer 
T. Employees of Employer T in the same position typically are 
offered assignments of 40 or more hours of service per week for 
periods expected to last for periods of three months to 12 months, 
subject to a request for renewal by the client. Employees of 
Employer T in similar positions to Employee F are typically offered 
and take new positions immediately upon cessation of a placement. At 
the time Employee F is hired by Employer T, Employer T has no reason 
to anticipate that Employee F's position of employment will differ 
from the typical employee in the same position.
    (ii) Conclusion. Employer T must assume that Employee F will be 
employed by Employer T and available for an offer of temporary 
placement for the entire initial measurement period. Under that 
assumption, Employer T would reasonably determine that Employee F is 
reasonably expected to average at least 30 hours of service per week 
for the 12-month initial measurement period. Accordingly, Employer T 
may not treat Employee F as a variable hour employee during the 
initial measurement period.
    Example 15 (Variable hour employee).  (i) Facts. Employee G is 
hired on an hourly basis by Employer S to fill in for employees who 
are absent and to provide additional staffing at peak times. 
Employer S expects that Employee G will average 30 hours of service 
per week or more for Employee G's first few months of employment, 
while assigned to a specific project, but also reasonably expects 
that the assignments will be of unpredictable

[[Page 8593]]

duration, that there will be periods of unpredictable duration 
between assignments, that the hours per week required by subsequent 
assignments will vary, and that Employee G will not necessarily be 
available for all assignments.
    (ii) Conclusion. Employer S cannot determine whether Employee G 
is reasonably expected to average at least 30 hours of service per 
week for the initial measurement period. Accordingly, Employer S may 
treat Employee G as a variable hour employee during the initial 
measurement period.
    Example 16 (Period between initial stability period and standard 
stability period).  (i) Facts. Employer R uses an 11-month initial 
measurement period for new variable hour, new seasonal, and new 
part-time employees with an administrative period that lasts from 
the end of the initial measurement period through the last day of 
the first calendar month beginning on or after the first anniversary 
of the employee's start date. Employer R uses a standard measurement 
period of October 15 through October 14, and an administrative 
period of October 15 through December 31. Employee H is hired as a 
variable hour employee on October 20, 2015, with an initial 
measurement period of October 20, 2015, through September 19, 2016, 
and an administrative period lasting through November 30, 2016. 
Employee H is a full-time employee based on the hours of service in 
the initial measurement period, and Employee H's stability period 
for the initial measurement period is December 1, 2016, through 
November 30, 2017. Employee H's first full standard measurement 
period begins on October 15, 2016, with an associated stability 
period beginning on January 1, 2018. The standard measurement period 
beginning on October 15, 2015, does not apply to Employee H because 
Employee H is not hired until October 20, 2015.
    (ii) Conclusion. For the period after the stability period 
associated with the initial measurement period and before the 
stability period associated with Employee H's first full standard 
measurement period (that is December 1, 2017, through December 31, 
2017), Employer R must treat Employee H as a full-time employee 
because the treatment as a full-time employee (or not a full-time 
employee) that applies during the stability period associated with 
the initial measurement period continues to apply until the 
beginning of the stability period associated with the first full 
standard measurement period during which the employee is employed.

    (6) Employees rehired after termination of employment or resuming 
service after other absence--(i) Treatment as a new employee after a 
period of absence for employees of employers other than educational 
organizations--(A) In general. The rules in this paragraph (d)(6)(i) 
apply to employers that are not educational organizations. For rules 
relating to employers that are educational organizations, see paragraph 
(d)(6)(ii) of this section. An employee who resumes providing services 
to (or is otherwise credited with an hour of service for) an applicable 
large employer that is not an educational organization 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 13 consecutive weeks 
immediately preceding the resumption of services. The rule set forth in 
this paragraph (d)(6)(i) 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.
    (B) Averaging method for special unpaid leave. For purposes of 
applying the look-back measurement method described in paragraph (d) of 
this section to an employee who is not treated as a new employee under 
paragraph (d)(6)(i) 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 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 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. There is no limit on the number of hours of service required to 
be excluded or credited (as the case may be) with respect to special 
unpaid leave. For purposes of this paragraph (d)(6)(i)(B), 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 (d)(6)(i)(B) is 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.
    (C) Averaging rules for employment break periods for employers 
other than educational organizations. The averaging rule for employment 
break periods described in paragraph (d)(6)(ii)(B) of this section 
applies only to educational organizations and does not apply to other 
employers.
    (ii) Treatment as a new employee after a period of absence for 
employees of employers that are educational organizations--(A) In 
general. The rules of this paragraph (d)(6)(ii) apply only to employers 
that are educational institutions. An employee who resumes providing 
services to (or is otherwise credited with an hour of service for) an 
applicable large employer that is an educational organization 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. The 
rule set forth in this paragraph (d)(6)(ii)(A) 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.
    (B) Averaging method for special unpaid leave and employment break 
periods. For purposes of applying the look-back measurement method 
described in paragraph (d) of this section to an employee who is not 
treated as a new employee under paragraph (d)(6)(ii)(A) of this 
section, an educational organization employer determines the employee's 
average hours of service for a measurement period by computing the 
average after excluding any special unpaid leave and 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 any employment break period during that measurement period at a 
rate equal to the average weekly rate at which the

[[Page 8594]]

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 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 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 
(d)(6)(ii)(B) 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 (d)(6)(ii)(B)) by the number of 
weeks in the employment break period. For purposes of this paragraph 
(d)(6)(ii)(B), 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 (d)(6)(ii)(B) 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.
    (iii) Treatment of continuing employee. Under the look-back 
measurement method, 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 purposes of the preceding sentence, a continuing employee 
treated as a full-time employee is 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. For this purpose, 
offering coverage by no later than the first day of the calendar month 
following resumption of services is deemed to be as soon as 
administratively practicable. If a continuing employee returns during a 
stability period in which the employee is treated as a full-time 
employee and the employer previously made the employee an offer of 
coverage with respect to the entire stability period and the employee 
declined the offer, the employer will continue to be treated as having 
offered coverage for that stability period and the employer need not 
make a new offer of coverage for the remainder of the ongoing stability 
period due to the employee's resumption of services.
    (iv) Rule of parity. For purposes of determining the period after 
which an employee may be treated as having terminated employment and 
having been rehired, an applicable large employer may choose a period, 
measured in weeks, of at least four consecutive weeks during which the 
employee was not credited with any hours of service that exceeds the 
number of weeks of that employee's period of employment with the 
applicable large employer immediately preceding the period and that is 
shorter than 13 weeks (for an employee of an educational organization 
employer, a period that is shorter than 26 weeks). For purposes of the 
preceding sentence, the duration of the immediately preceding period of 
employment is determined after application to that period of employment 
of the averaging methods described in paragraphs (d)(6)(i)(B) and 
(d)(6)(ii)(B) of this section (relating to employment break periods and 
special unpaid leave), if applicable.
    (v) International transfers. An employer may treat an employee as 
having terminated employment if the employee transfers to a position at 
the same applicable large employer (including a different applicable 
large employer member that is part of the same applicable large 
employer) if the position is anticipated to continue indefinitely or 
for at least 12 months and if substantially all of the compensation 
will constitute income from sources without the United States (within 
the meaning of sections 861 through 863 and the regulations 
thereunder). With respect to an employee transferring from a position 
that was anticipated to continue indefinitely or for at least 12 months 
and in which substantially all of the compensation for the hours of 
service constitutes income from sources without the United States 
(within the meaning of sections 861 through 863 and the regulations 
thereunder) to a position at the same applicable large employer 
(including a different applicable large employer member that is part of 
the same applicable large employer) with respect to which substantially 
all of the compensation will constitute U.S. source income, the 
employer may treat that employee as a new hire to the extent consistent 
with the rules related to rehired employees in paragraph (d)(6) of this 
section.
    (vi) Anti-abuse rule. For purposes of this paragraph (d)(6), any 
hour of service is 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 (d)(6) of this section, or the application of the averaging 
method for employment break periods under paragraph (d)(6)(ii)(B) of 
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 (d)(6)(ii)(B) of this section would 
apply, but for the employer's request or requirement that the employee 
perform one or more hours 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 paragraph (d)(6)(ii)(B) of this 
section will apply.
    (vii) Examples. The following examples illustrate the provisions of 
paragraph (d)(6) of this section. All employers in these examples are 
applicable large employer members with 200 full-time employees 
(including full-time equivalent employees), each is in a different 
applicable large employer group, and each determines full-time employee 
status under the look-back measurement method. None of the periods 
during which an employee is not credited with an hour of service for an 
employer involve special unpaid leave 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) 
for 10 years. On April 1, 2015, Employee A terminates employment and 
is not credited with an hour of service until June 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 the period for which Employee A is not 
credited with any hours of service is not longer than Employee A's 
prior period of employment and is less than 13 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

[[Page 8595]]

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 13 
weeks, Employee A is 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 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 Y, an 
educational organization. Employee B is employed for 38 hours of 
service per week on average from September 7, 2014, through May 23, 
2015, 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. Employee B resumes providing 
services for Employer Y on September 7, 2015, when the new school 
year begins.
    (ii) Conclusion. Because the period from May 24, 2015 through 
September 5, 2015 (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 24, 2015, and having been rehired on 
September 6, 2015. Also, for purposes of determining Employee B's 
average hours of service 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 of service per week for the 15 weeks between May 
24, 2015 and September 5, 2015, during which Employee B otherwise 
was credited with no hours of service. However, Employer Y is not 
required to credit more than 501 hours of service for the employment 
break period (15 weeks x 38 hours = 570 hours).
    Example 4.  (i) Facts. Same facts as Example 3, except that 
Employee B does not resume providing services for Employer Y until 
December 5, 2015.
    (ii) Conclusion. Because the period from May 24, 2015 through 
December 5, 2015, exceeds 26 weeks, Employee B may be treated as 
having terminated employment on May 24, 2015, and having been 
rehired on December 5, 2015. Because Employee B is treated as a new 
employee on December 5, 2015, Employee B's hours of service prior to 
termination are not 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 Employee B is rehired. The 
averaging method for employment break periods applicable to 
educational organizations does not apply because Employee B is 
treated as a new employee rather than a continuing employee as of 
the date of resumption of services.

    (e) Use of the look-back measurement method and the monthly 
measurement method for different categories of employees. Different 
applicable large employer members of the same applicable large employer 
may use different methods of determining full-time employee status 
(that is, either the monthly measurement method or the look-back 
measurement method). In addition, an applicable large employer member 
may use either the monthly measurement method or the look-back 
measurement method for each of the categories of employees set forth in 
paragraphs (d)(1)(v) and (d)(3)(v) of this section, and is not required 
to use the same method for all categories.
    (f) Changes in employment status resulting in a change in full-time 
employee determination method--(1) Change in employment status from a 
position to which a look-back measurement method applies to a position 
to which the monthly measurement method applies, or vice versa--(i) 
Change from look-back measurement method to monthly measurement method. 
For an employee transferring from a position under which the look-back 
measurement method is used to determine the employee's status as a 
full-time employee, to a position under which the monthly measurement 
method is used to determine the employee's status as a full-time 
employee, the following rules apply:
    (A) For an employee who at the time of the change of position is in 
a stability period under which the employee is treated as a full-time 
employee, the employer must continue to treat the employee as a full-
time employee through the end of the stability period;
    (B) For an employee who at the time of the change of position is in 
a stability period under which the employee is not treated as a full-
time employee, the employer may continue to treat the employee as not a 
full-time employee through the end of the stability period, or may 
apply the monthly measurement method set forth in paragraph (c) of this 
section through the end of the stability period beginning with any 
calendar month including the calendar month in which the change in 
employment status occurs or any subsequent calendar month;
    (C) For the stability period associated with the measurement period 
during which the change in employment status occurs, the employer must 
treat the employee as a full-time employee for any calendar month 
during which the employee either would be treated as a full-time 
employee under the stability period that would have applied based on 
the measurement period in which the change in employment status 
occurred or would be treated as a full-time employee under the monthly 
measurement method; and
    (D) For any calendar month subsequent to the stability period 
identified in paragraph (f)(1)(i)(C) of this section, the monthly 
measurement method applies for determination of the employee's status 
as a full-time employee.
    (ii) Change from monthly measurement method to look-back 
measurement method. For an employee who is transferring from a position 
under which the monthly measurement method is used to determine the 
employee's status as a full-time employee, to a position under which a 
look-back measurement method is used to determine the employee's status 
as a full-time employee, the following rules apply:
    (A) For the remainder of the applicable stability period during 
which the change in employment status occurs, the employer must 
continue to use the monthly measurement method to determine the 
employee's status as a full-time employee unless the employee's hours 
of service prior to the change in employment status would have resulted 
in the employee being treated as a full-time employee during the 
stability period in which the change in employment status occurs, in 
which case the employer must treat the employee as a full-time employee 
for that stability period;
    (B) For the applicable stability period following the measurement 
period during which the change in employment status occurs, the 
employer must treat the employee as a full-time employee for any 
calendar month during which the employee either would be treated as a 
full-time employee based on the measurement period during which the 
change in employment status occurs or would be treated as a full-time 
employee under the monthly measurement method; and
    (C) For any calendar month subsequent to the stability period 
identified in paragraph (f)(1)(ii)(B) of this section, the look-back 
measurement

[[Page 8596]]

method applies for determination of the employee's status as a full-
time employee.
    (iii) Examples. The following examples illustrate the rules of this 
paragraph (f). In each example, the employer is an applicable large 
employer with 200 full-time employees (including FTEs). For each 
example, the employer uses the monthly measurement method for 
determining whether a salaried employee is a full-time employee, and 
the look-back measurement method for determining whether an hourly 
employee is a full-time employee with a measurement period from October 
15 through October 14 of the following calendar year, and a stability 
period from January 1 through December 31. In each case, the relevant 
employee has been employed continuously for several years.
    Example 1 (Look-back measurement method to monthly measurement 
method).  Employee A is an hourly employee. Based on Employee A's 
hours of service from October 15, 2015, through October 14, 2016, 
Employee A is treated as a full-time employee from January 1, 2017, 
through December 31, 2017. On July 1, 2017, Employee A transfers 
from a position as an hourly employee to a position as a salaried 
employee. For the months July 2017 through December 2017, Employee A 
must be treated as a full-time employee. Employee A is employed for 
hours of service from October 15, 2016, through October 14, 2017, 
such that under the applicable look-back measurement method Employee 
A would be treated as a full-time employee for the period of January 
1, 2018, through December 31, 2018. Accordingly, Employee A must be 
treated as a full-time employee for the calendar year 2018. For 
calendar year 2019, the determination of whether Employee A is a 
full-time employee is made under the monthly measurement method.
    Example 2 (Look-back measurement method to monthly measurement 
method).  Same facts as Example 1, except that based on Employee A's 
hours of service from October 15, 2015, through October 14, 2016, 
Employee A is not treated as a full-time employee from January 1, 
2017, through December 31, 2017. For the months July 2017 through 
December 2017, Employer Z may either treat Employee A as not a full-
time employee or apply the monthly measurement method to determine 
Employee A's status as a full-time employee. Employee A is employed 
for hours of service from October 15, 2016, through October 14, 
2017, such that under the applicable look-back measurement method 
Employee A would be treated as a full-time employee for the period 
of January 1, 2018, through December 31, 2018. Employee A must be 
treated as a full-time employee for the calendar year 2018. For 
calendar year 2019, the determination of whether Employee A is a 
full-time employee is made under the monthly measurement method.
    Example 3 (Look-back measurement method to monthly measurement 
method).  Same facts as Example 1, except that Employee A is 
employed for hours of service from October 15, 2016, through October 
14, 2017, such that under the applicable look-back measurement 
method Employee A would not be treated as a full-time employee for 
the period of January 1, 2018, through December 31, 2018. For the 
calendar year 2018, Employer Z must treat Employee A as a full-time 
employee only for calendar months during which Employee A would be a 
full-time employee under the monthly measurement method. For 
calendar year 2019, the determination of whether Employee A is a 
full-time employee is made under the monthly measurement method.
    Example 4 (Monthly measurement method to look-back measurement 
method).  Employee B is a salaried employee of Employer Y. On July 
1, 2017, Employee B transfers to an hourly employee position. Based 
on Employee B's hours of service from October 15, 2015, through 
October 14, 2016, Employee B would have been treated as a full-time 
employee for the stability period from January 1, 2017, through 
December 31, 2017, had the look-back measurement method applicable 
to hourly employees applied to Employee B for the entire stability 
period. For the calendar months January 2017 through June 2017 
(prior to Employee B's change to hourly employee status), Employee 
B's status as a full-time employee is determined using the monthly 
measurement method. For the calendar months July 2017 through 
December 2017, Employer Y must treat Employee B as a full-time 
employee because Employee B would have been treated as a full-time 
employee during that portion of the stability period had the look-
back measurement method applied to Employee B for that entire 
stability period. Employee B is employed for hours of service from 
October 15, 2016, through October 14, 2017, such that under the 
applicable look-back measurement method Employee B would be treated 
as a full-time employee for the period January 1, 2018, through 
December 31, 2018. Accordingly, Employee B must be treated as a 
full-time employee for the calendar year 2018. For calendar year 
2019, the determination of whether Employee B is a full-time 
employee is made under the applicable look-back measurement method.
    Example 5 (Monthly measurement method to look-back measurement 
method).  Same facts as Example 4, except that based on Employee B's 
hours of service from October 15, 2015, through October 14, 2016, 
Employee B would not have been treated as a full-time employee from 
January 1, 2017, through December 31, 2017. For the calendar months 
of 2017, Employer Y applies the monthly measurement method to 
determine Employee B's status as a full-time employee. Employee B is 
employed for hours of service from October 15, 2016, through October 
14, 2017, such that under the applicable look-back measurement 
method Employee B would be treated as a full-time employee for the 
period January 1, 2018, through December 31, 2018. Accordingly, 
Employee B must be treated as a full-time employee for the calendar 
year 2018. For calendar year 2019, the determination of whether 
Employee B is a full-time employee is made under the applicable 
look-back measurement method.
    Example 6 (Monthly measurement method to look-back measurement 
method). Same facts as Example 4, except that Employee B is employed 
for hours of service from October 15, 2016, through October 14, 
2017, such that under the applicable look-back measurement method 
Employee B would not be treated as a full-time employee for the 
period of January 1, 2018, through December 31, 2018. For the 
calendar year 2018, Employer Y must treat Employee B as a full-time 
employee only for calendar months during which Employee B would be a 
full-time employee under the monthly measurement method.

    (2) Special rule for certain employees to whom minimum value 
coverage has been continuously offered--(i) In general. Notwithstanding 
the rules in paragraphs (e) and (f) of this section, an employer using 
the look-back measurement method to determine the full-time employee 
status of an employee may apply the monthly measurement method to that 
employee beginning on the first day of the fourth full calendar month 
following the calendar month in which the employee experiences a change 
in employment status such that, if the employee had begun employment in 
the new position or status, the employee would have reasonably been 
expected not to be employed on average at least 30 hours of service per 
week (for example, the employee has changed to a part-time position of 
only 20 hours of service per week). This rule only applies with respect 
to an employee to whom the applicable large employer member offered 
minimum value coverage by the first day of the calendar month following 
the employee's initial three full calendar months of employment through 
the calendar month in which the change in employment status described 
in this paragraph (f)(2) occurs, and only if the employee actually 
averages less than 30 hours of service per week for each of the three 
full calendar months following the change in employment status. For the 
three full calendar months between the employee's change in employment 
status and the application of the monthly measurement method, the 
employee's full-time employee status is determined based on the 
employee's status during the applicable stability period(s). Under this 
rule, an employer may apply the monthly measurement method to an 
employee even if the employer does not apply the monthly measurement 
method to the other employees in the same category of employees under 
paragraph (d)(1)(v) or (d)(3)(v) of this section (for example,

[[Page 8597]]

under this method an employer could apply the monthly measurement 
method to an hourly employee, even if the employer uses the look-back 
measurement method to determine full-time employee status of all other 
hourly employees). The employer may continue to apply the monthly 
measurement method through the end of the first full measurement period 
(and any associated administrative period) that would have applied had 
the employee remained under the applicable look-back measurement 
method.
    (ii) Examples. The following examples illustrate the rule of 
paragraphs (f)(2) of this section. In each example, the employer is an 
applicable large employer with 200 full-time employees (including 
FTEs).

    Example 1 (New variable hour employee, no delay in coverage, 
becomes non-full-time employee). (i) Facts. Employer Z, an 
applicable large employer, uses the look-back measurement method to 
determine the full-time employee status for all of its employees. On 
May 10, 2015, Employer Z hired Employee A who is a variable hour 
employee. Although Employee A is a new variable hour employee, so 
that Employer Z could wait until the end of an initial measurement 
period to offer coverage to Employee A without an assessable payment 
under section 4980H with respect to Employee A, Employer Z offers 
coverage that provides minimum value to Employee A on September 1, 
2015. For its ongoing employees, Employer Z has chosen to use a 12-
month standard measurement period starting October 15 and a 12-month 
stability period associated with that standard measurement period 
starting January 1. Employee A continues in employment with Employer 
Z for over five years and averages more than 30 hours of service per 
week for all measurement periods through the measurement period 
ending October 14, 2020. On February 12, 2021, Employee A 
experiences a change in position of employment with Employer Z to a 
position under which Employer Z reasonably expects Employee A to 
average less than 30 hours of service per week. For the calendar 
months after February 2021, Employee A averages less than 30 hours 
of service per week. Employer Z offered Employee A coverage that 
provided minimum value continuously from September 1, 2015, through 
May 31, 2021. Effective June 1, 2021, Employer Z elects to apply the 
monthly measurement method to determine Employee A's status as a 
full-time employee for the remainder of the stability period ending 
December 31, 2021, and the calendar year 2022 (which is through the 
end of the first full measurement period following the change in 
employment status plus the associated administrative period). 
Applying the stability period beginning January 1, 2021, Employer Z 
treats Employee A as a full-time employee for each calendar month 
from January 2021 through May 2021. Applying the monthly measurement 
method, for each calendar month from June 2021 through December 
2022, Employer Z treats Employee A as not a full-time employee.
    (ii) Conclusion. Because Employer Z offered coverage that 
provided minimum value to Employee A from no later than the first 
day of the fourth full calendar month following Employee A's start 
date through the calendar month in which the change in employment 
status occurred, and because Employee A did not average 30 hours of 
service per week for any of the three calendar months immediately 
following Employee A's change in employment status to an employee 
not reasonably expected to average 30 hours of service per week, 
Employer Z may use the monthly measurement method to determine the 
full-time employee status of Employee A beginning on the first day 
of the fourth month following the change in employment status (June 
1, 2021) through the end of the first full measurement period (plus 
any associated administrative period) immediately following the 
change in employment status (December 31, 2022). Because Employee A 
did not average at least 30 hours of service per week for any 
calendar month from June 2021 through December 2022, Employer Z has 
properly treated Employee A as not a full-time employee for those 
calendar months.
    Example 2 (New full-time employee, no delay in coverage, becomes 
non-full-time employee). (i) Facts. Same facts as Example 1, except 
that at Employee A's start date, Employer Z reasonably expects that 
Employee A will average at least 30 hours of service per week. 
Accordingly, Employer Z offers coverage to Employee A beginning on 
September 1, 2015, and offers coverage continuously to Employee A 
for all calendar months through May 2021.
    (ii) Conclusion. Same as Example 1.

    (g) 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.
    (h) Additional guidance. With respect to the determination of full-
time employee status, including determination of hours of service, the 
Commissioner may prescribe additional guidance of general 
applicability, published in the Internal Revenue Bulletin (see Sec.  
601.601(d)(2)(ii)(b) of this chapter).
    (i) Effective/applicability date. This section is applicable for 
periods after December 31, 2014.


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 (other than employees in a limited 
non-assessment period for certain employees and as adjusted in 
accordance with paragraph (e) 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). For purposes of the preceding sentence, an 
employee in a limited non-assessment period for certain employees is 
not included in the calculation.
    (b) Offer of coverage--(1) In general. 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 in the coverage at least once 
with respect to the plan year, or does not have an effective 
opportunity to decline to enroll if the coverage offered does not 
provide minimum value or requires an employee contribution for any 
calendar month of more than 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, the applicable federal 
poverty line is the federal poverty line for the 48 contiguous states 
and the District of Columbia. Whether an employee has an effective 
opportunity to enroll or to decline to enroll is determined based on 
all the relevant facts and circumstances,

[[Page 8598]]

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. An 
employee's election of coverage from a prior year that continues for 
the next plan year unless the employee affirmatively elects to opt out 
of the plan constitutes an offer of coverage for purposes of section 
4980H.
    (2) Offer of coverage on behalf of another entity. For purposes of 
section 4980H, an offer of coverage by one applicable large employer 
member to an employee for a calendar month is treated as an offer of 
coverage by all applicable large employer members for that calendar 
month. In addition, an offer of coverage made to an employee on behalf 
of a contributing employer under a multiemployer or single employer 
Taft-Hartley plan or multiple employer welfare arrangement (MEWA) is 
treated as made by the employer. For an offer of coverage to an 
employee performing services for an employer that is a client of a 
staffing firm, in cases in which the staffing firm is not the common 
law employer of the individual and the staffing firm makes an offer of 
coverage to the employee on behalf of the client employer under a plan 
established or maintained by the staffing firm, the offer is treated as 
made by the client employer for purposes of section 4980H only if the 
fee the client employer would pay to the staffing firm for an employee 
enrolled in health coverage under the plan is higher than the fee the 
client employer would pay the staffing firm for the same employee if 
that employee did not enroll in health coverage under the plan.
    (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, regardless of whether the employer uses the payroll 
period rule set forth in Sec.  54.4980H-3(d)(1)(ii) or the weekly rule 
set forth in Sec.  54.4980H-3(c)(3) to determine full-time employee 
status for the calendar 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 calendar month had the 
employee been employed for the entire calendar month, the employee is 
treated as having been offered coverage for that entire calendar month. 
In addition, an applicable large employer member is not subject to an 
assessable payment under section 4980H with respect to an employee for 
the calendar month in which the employee's start date occurs if the 
start date is on a date other than the first day of the calendar month, 
and, in addition, with respect to the calendar month in which the start 
date occurs, such an employee is not included for purposes of the 
calculation of any potential liability under section 4980H(a).
    (d) Application to applicable large employer member. The liability 
for an assessable payment under section 4980H(a) 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. For an employee who was an employee of more than one 
applicable large employer member of the same applicable large employer 
during a calendar month, the liability for the assessable payment under 
section 4980H(a) for a calendar month applies to the applicable large 
employer member for whom the employee has the greatest number of hours 
of service for that calendar month (if the employee has an equal number 
of hours of service for two or more applicable large employer members 
of the same applicable large employer for the calendar month, those 
applicable large employer members can treat one of those members as the 
employer of that employee for that calendar month for purposes of this 
section, and if the members do not select one member, or select in an 
inconsistent manner, the IRS will select a member to be treated as the 
employer of that employee for purposes of the assessable payment 
determination). 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 will not be liable for an assessable 
payment under both section 4980H(a) and section 4980H(b).
    (e) Allocated reduction of 30 full-time employees. For purposes of 
the liability calculation under paragraph (a) of this section, with 
respect to each calendar month, 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 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 month (after 
application of the rules of paragraph (d) of this section addressing 
employees who work for more than one applicable large employer member 
during a calendar month). If an applicable large employer member's 
total allocation is not a whole number, the allocation is rounded to 
the next highest whole number. This rounding rule may result in the 
aggregate reduction for the entire group of applicable large employer 
members exceeding 30.
    (f) Example. The following example illustrates the provisions of 
paragraphs (a) and (e) of this section.

    Example.  (i) Facts. Applicable large employer member Z and 
applicable large employer member Y are the two members of an 
applicable large employer. Applicable large employer member Z 
employs 40 full-time employees in each calendar month of 2017. 
Applicable large employer member Y employs 35 full-time employees in 
each calendar month of 2017. Assume that for 2017, the applicable 
payment amount for a calendar month is $2,000 divided by 12. 
Applicable large employer member Z does not sponsor an eligible 
employer-sponsored plan for any calendar month of 2017, and receives 
a Section 1411 Certification for 2017 with respect to at least one 
of its full-time employees. Applicable large employer member Y 
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 Z is subject to an assessable 
payment under section 4980H(a) for 2017 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 Y is not 
subject to an assessable payment under section 4980H(a) for 2017.

    (g) Additional guidance. With respect to assessable payments under 
section 4980H(a), the Commissioner may prescribe additional guidance of 
general applicability, published in the Internal Revenue Bulletin (see 
Sec.  601.601(d)(2)(ii)(b) of this chapter).
    (h) Effective/applicability date. This section is applicable for 
periods after December 31, 2014.


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 (provided that an employee is treated as having 
been offered coverage only if the employer also offers coverage to that 
employee's dependents)) and the applicable large employer member has 
received a Section 1411 Certification with respect to one or more full-
time employees of

[[Page 8599]]

the applicable large employer member, 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 in a limited non-assessment period 
for certain employees and the number of other employees 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 member 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(e)).
    (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.
    (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, regardless of whether the employer uses the payroll 
period rule set forth in Sec.  54.4980H-3(d)(1)(ii) or the weekly rule 
set forth in Sec.  54.4980H-3(c)(3) to determine full-time employee 
status for the calendar 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. Also, an applicable large employer member is not subject to 
an assessable payment under section 4980H with respect to an employee 
for the calendar month in which the employee's start date occurs if the 
start date is on a date other than the first day of the calendar 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. For an employee who was a full-time 
employee of more than one applicable large employer member during that 
calendar month, the liability for the assessable payment under section 
4980H(b) for a calendar month applies to the applicable large employer 
member for whom the employee has the greatest number of hours of 
service for that calendar month (if the employee has an equal number of 
hours of service for two or more applicable large employer members for 
the calendar month, those applicable large employer members can treat 
one of those members as the employer of that employee for that calendar 
month for purposes of this paragraph (d), and if the members do not 
select one member, or select in an inconsistent manner, the IRS will 
select a member to be treated as the employer of that employee for 
purposes of the assessable payment determination). 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 will 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 an 
applicable premium tax credit or cost-sharing reduction if that offer 
of coverage is not affordable within the meaning of section 
36B(c)(2)(C)(i) and the regulations thereunder.
    (2) Affordability safe harbors for section 4980H(b) purposes. The 
affordability safe harbors set forth in paragraph (e)(2)(ii) through 
(iv) of this section 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 applicable 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 an applicable 
premium tax credit or cost-sharing reduction is 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 this paragraph (e)(2) only if the employer offers 
its full-time employees and their dependents the opportunity to enroll 
in minimum essential coverage 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 member, 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. Reasonable categories generally include 
specified job categories, nature of compensation (hourly or salary), 
geographic location, and similar bona fide business criteria. An 
enumeration of employees by name or other specific criteria having 
substantially the same effect as an enumeration by name is not 
considered a reasonable 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 except 
with respect to an active employee eligible for continuation coverage) 
does not exceed 9.5 percent of that employee's Form W-2 wages from the 
employer (and any other member of the same applicable large employer 
that also pays wages to that employee) 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 during the plan year 
for plans with non-calendar year plan years) 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

[[Page 8600]]

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 hourly 
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 an amount equal to 130 hours multiplied by the 
lower of the employee's hourly rate of pay as of the first day of the 
coverage period (generally the first day of the plan year) or the 
employee's lowest hourly rate of pay during the calendar month. An 
applicable large employer member satisfies the rate of pay safe harbor 
with respect to a non-hourly 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 the employee's 
monthly salary, as of the first day of the coverage period (instead of 
130 multiplied by the hourly rate of pay); provided that if the monthly 
salary is reduced, including due to a reduction in work hours, the safe 
harbor is not available, 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. 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 monthly amount 
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 this paragraph (e)(2). In 
each example, each employer is an applicable large employer member with 
200 full-time employees (including full-time equivalent employees).

    Example 1 (Form W-2 wages safe harbor).  (i) Facts. Employee A 
is employed by Employer Z consistently from January 1, 2015, through 
December 31, 2015. In addition, Employer Z offers Employee A and his 
dependents minimum essential coverage during that period that 
provides minimum value. 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 Employer Z are $24,000.
    (ii) Conclusion. Because the employee contribution for 2015 is 
less than 9.5 percent 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 percent of $24,000).
    Example 2 (Form W-2 wages safe harbor).  (i) Facts. Employee B 
is employed by Employer Y from January 1, 2015, through September 
30, 2015. In addition, Employer Y offers Employee B and his 
dependents minimum essential coverage during that period that 
provides minimum value. 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 Employer 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 employee contribution for 2015 is 
less than 9.5 percent of Employee B's adjusted Form W-2 wages for 
2015, the coverage offered is treated as affordable with respect to 
Employee B for 2015 ($900 is 5 percent of $18,000).
    Example 3 (Form W-2 wages safe harbor).  (i) Facts. Employee C 
is employed by Employer X from May 15, 2015, through December 31, 
2015. In addition, Employer X offers Employee C and her dependents 
minimum essential coverage during the period from August 1, 2015, 
through December 31, 2015, that provides minimum value. 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 Employer X are 
$15,000. For purposes of applying the affordability safe harbor, the 
Form W-2 wages are multiplied 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 employee 
contribution for the period for which coverage was offered ($500).
    (ii) Conclusion. Because the employee contribution of $500 is 
less than 9.5 percent 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 percent of $9,375).
    Example 4 (Rate of pay safe harbor).  (i) Facts. Employer W 
offers its full-time employees and their dependents minimum 
essential coverage that provides minimum value. For the 2016 
calendar year, Employer W is using the rate of pay safe harbor to 
establish premium contribution amounts for full-time employees paid 
at a rate of $7.25 per hour (the minimum wage in Employer W's 
jurisdiction) for each calendar month of the entire 2016 calendar 
year. Employer W can apply the affordability safe harbor by using an 
assumed monthly income amount that is based on an assumed 130 hours 
of service multiplied by $7.25 per hour ($942.50 per calendar 
month). To satisfy the safe harbor, Employer W would set the 
employee monthly contribution amount at a rate that does not exceed 
9.5 percent of the assumed monthly income of $942.50. Employer W 
sets the employee contribution for self-only coverage at $85 per 
calendar month for 2016.
    (ii) Conclusion. Because $85 is less than 9.5 percent of the 
employee's assumed monthly income at a $7.25 rate of pay, the 
coverage offered is treated as affordable under the rate of pay safe 
harbor for each calendar month of 2016 ($85 is 9.01 percent of 
$942.50).
    Example 5 (Rate of pay safe harbor).  (i) Facts. Employee E is 
employed by Employer V from May 1, 2015, through December 31, 2015. 
Employer V offers Employee E and her dependents minimum essential 
coverage from May 1, 2015, through December 31, 2015, that provides 
minimum value. The employee contribution for self-only coverage is 
$100 per calendar month. From May 1,

[[Page 8601]]

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 for the calendar months May 2015 through 
October 2015, Employer V may assume that Employee E earned $1,300 
per calendar month (130 hours of service multiplied by $10 (which is 
the lower of the employee's hourly rate of pay at the beginning of 
the coverage period ($10) and the lowest hourly rate of pay for the 
calendar month ($10)). Accordingly, affordability is determined by 
comparing the assumed income ($1,300 per month) to the employee 
contribution ($100 per calendar month). For the calendar months 
November 2015 through December 2015, Employer V may assume that 
Employee E earned $1,300 per calendar month (130 hours of service 
multiplied by $10 (which is the lower of the employee's hourly rate 
of pay at the beginning of the coverage period ($10) and the lowest 
hourly rate of pay for the calendar month ($12)). Accordingly, 
affordability is determined by comparing the assumed income ($1,300 
per month) to the employee contribution ($100 per calendar month).
    (ii) Conclusion. Because $100 is less than 9.5 percent of 
Employee E's assumed monthly income for each calendar month from May 
2015 through December 2015, the coverage offered is treated as 
affordable with respect to Employee E for May 2015 through December 
2015 ($100 is 7.69 percent of $1,300).
    Example 6 (Federal poverty line safe harbor).  (i) Facts. 
Employee F is employed by Employer T from January 1, 2015, through 
December 31, 2015. In addition, Employer T offers Employee F and his 
dependents minimum essential coverage during that period that 
provides minimum value. Employer T uses the look-back measurement 
method. Under that measurement method as applied by Employer T, 
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 $11,670. With respect to 
Employee F, Employer T sets the monthly employee contribution for 
employee single-only coverage for each calendar month of 2015 at 
$92.39 (9.5 percent of $11,670, divided by 12).
    (ii) Conclusion. Regardless of Employee F's actual wages for any 
calendar month in 2015, 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, because the 
employee contribution does not exceed 9.5 percent of the federal 
poverty line.

    (f) Additional guidance. With respect to assessable payments under 
section 4980H(b), including the determination of whether an offer of 
coverage is affordable for purposes of section 4980H, the Commissioner 
may prescribe additional guidance of general applicability, published 
in the Internal Revenue Bulletin (see Sec.  601.601(d)(2)(ii)(b) of 
this chapter).
    (g) Effective/applicability date. This section is applicable for 
periods after December 31, 2014.


Sec.  54.4980H-6  Administration and procedure.

    (a) In general. [Reserved]
    (b) Effective/applicability date. This section is applicable for 
periods after December 31, 2014.

PART 301--PROCEDURE AND ADMINISTRATION

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

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

    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, 2014.
* * * * *

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: February 7, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-03082 Filed 2-10-14; 4:15 pm]
BILLING CODE 4830-01-P