IRS Snubs Public Schools On Employer Penalties

The Internal Revenue Service issued final regulations on February 10, 2014 regarding the employer penalties under the Patient Protection and Affordable Care Act (“PPACA”).  A copy of the final regulations is available here.

Over the past year, Indiana public school administrators, school boards and employees have encouraged the IRS to modify the proposed regulations on the employer penalties, which were originally published on December 28, 2012.  The proposed regulations imposed a special rule on educational institutions that prohibited them from utilizing summer break to average hours to satisfy the 30 hour full-time threshold.

The concerted effort by Indiana public schools has been significant and has received national attention.  Education Week published an article that suggested that “the most obvious battleground over districts’ implementation of the law is Indiana.”  Notwithstanding the efforts of many (including more than 100 letters, oral comments delivered by 3 school administrators during the April 23, 2013 IRS public hearing and communications by federal legislators), the IRS restricted its discussion of the issue to a single sentence in the 227 page final regulations.

“However, some employers and some 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 IRS subsequently upheld its rule prohibiting educational institutions from utilizing employment break periods in averaging hours.

The final regulations are substantially similar to the proposed regulations that were published more than thirteen months ago.  However, there are some provisions that are worthy of mention:

  • The final regulations contain good news for public schools and other employers with 50 to 99 full-time equivalent employees.  For this limited group, the IRS has determined that the employer penalties will not apply until 2016.
  • Most Indiana public school corporations employ more than 100 full-time equivalent employees.  The IRS still takes the position that the employer penalties for these school corporations will continue to take effect in 2015.  However, the Sledgehammer (Part A) penalty for schools with more than 100 full-time equivalent employees will only apply if the school fails to offer coverage to at least 70% of its full-time employees.  This threshold will rise to 95% in 2016.  The 70% threshold in 2015 may provide opportunities for schools, but even if the test can be met, the school will still be subject to the Mallet (Part B) penalty if one or more full-time employees receives a subsidy through the marketplace.  Note that the State of Indiana and 39 Indiana public schools filed a lawsuit in 2013 against the IRS regarding the application of the employer penalty and that lawsuit is currently pending.
  • The final regulations now provide that bona fide volunteers for government or tax-exempt entities will not be counted for purposes of the employer penalties.  A lay coach will generally be considered a bona fide volunteer even if the coach receives reasonable benefits or a nominal fee.  However, classified employees who coach will continue to have coaching and other extracurricular hours counted for purposes of the 30 hour threshold.
  • Some schools with non-calendar year plans will not be required to comply with the final regulations until the start of their respective plan years beginning in 2015.
  • Schools may utilize a 6 month measurement period in 2014 that will translate into a 12 month stability period in 2015.

The United States Treasury also published a fact sheet on the final regulations, which is available here.  We will provide more guidance on these final regulations in the coming days.

About Jim Hamilton

I am an employee benefits partner with Bose McKinney & Evans LLP. My broad-based practice covers health and welfare arrangements, insurance, executive compensation and federal and state taxation. Among other areas, I have specific experience with PPACA, HIPAA, COBRA, ERISA and numerous other state and federal laws affecting employee benefit plans.
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