hansonbridgett · penalty under section 4980h (the "a" penalty). this is not the only...

ROBERT A. GLUMANNE C. HYDORNPARTNERSDIRECT DIAL (415) 995-5830 (Blum)DIRECT DIAL (415) 995-5893 (Hydorn)E-MAIL rblumCa?hansonbridaett.comE-MAIL ahvdorn(a~hansonbrdigett.com

March 15, 2013

VIA HTTP://WWW.REGULATIONS.GOV [IRS REG-138006-12]

internal Revenue ServiceCC:PA:LPD:PR (REG-138006-12)P. O. Box 7604Ben Franklin StationWashington, D.C. 20044

HansonBridgett

Notice of Proposed RulemakingShared Responsibility for Employers Regarding Health Coverage

Dear Sir or Madam:

This letter provides comments on proposed regulations under Section 4980H concerning shared

responsibility for employers regarding health coverage under the Patient Protection and

Affordable Care Act ("ACA") enacted March 23, 2010, sometimes called the "Pay or Play°'

regulations. We represent a number of California employers in many diverse industries that are

substantially challenged by the proposed regulations, including local government, health care,

and public utilities.

A. Summary

1. Transition Rules

We respectfully request that the transition rules in the proposed regulations be extended to

accommodate the practical needs of employers and in recognition that these rules require

extraordinary change in the way that employers have operated for many decades. Change of

the extent required in the Pay or Play rules takes time to implement. The type of transition we

request fits with transition rules that the Service has historically provided with other new, very

complicated rules affecting employee benefits.

2. Correction Program

The Service has had extremely good experience with programs that allow employers to correct

errors in complicated employee benefit programs. These include the "EPCRS" program for tax

qualified retirement plans and the correction program for Section 409A violations. We

respectfully propose that the Service establish a voluntary correction program under Section

4980H, as described below. This is particularly necessary to avoid the very unfortunate

situation where an employer has taken reasonable steps to comply with the coverage rules,

provides affordable health care with substantial coverage and provides substantial premium

subsidies, but misses the 95% coverage requirement and is therefore required to also pay the

Hanson Bridgett LLP425 Market Street, 26th Floor, San Francisco, CA 94105 hansonbridgett.com 5031119.1

Internal Revenue ServiceCC:PA:LPD:PR (REG-138006-12)Notice of Proposed RulemakingShared Responsibility for Employers Regarding Health CoverageMarch 15, 2013

penalty under Section 4980H (the "A" Penalty). This is not the only situation where a correction

program is needed.

3. Technical Comments

We respectfully propose technical changes in the proposed regulations. For example, the

proposed rules on measurement of full time status for new variable hour hires fit the general

measurement scheme, but can be very difficult to work with. We respectfully propose analternative, and optional, method of measurement described below.

B. Transition Rules

The Pay or Play rules require major change in the way that employers manage health carecoverage for their employees. For decades, employers have largely determined to whom

coverage has been extended and how much coverage is provided, subject of course to rules

such as COBRA and employment discrimination laws. Our experience is that employers areworking diligently to comply with the new shared responsibility rules, but there are substantial

hurdles that must be overcome and more time is needed to do this.

1. Practical Challenges for Employers

Here are some of the practical challenges that employers must deal with under the proposed

regulations:

Local government - Hundreds of California local government agencies rely on the California

Public Employees Retirement System ("CaIPERS") for health care coverage for their

employees. CaIPERS does not require or maintain the records that employers need to

determine "full time" status. The agencies do not provide coverage in accord with the ACA,

but instead in accord with local government policy and in conformity with CaIPERS rules.

Further, the basis for measurement under the proposed rules comes from ERISA, yet

government agencies are not subject to ERISA and have never had to consider this type of

recordkeeping. The Pay or Play rules require major change in a very short period for these

employers, and may significantly affect multiple areas of operation including compensation

policies, IT, bargaining, and, of course, finance and limited budgets.

Collectively-bargained — A number of the employers we represent collectively bargain for

health benefits and other compensation. Many have entered into agreements that do not

currently fit with the Pay or Play rules. For example, some require probation periods that

extend more than 90 days before health coverage begins. These agreements may extend

beyond the effective date of the new rules. However, by law, employers cannot unilaterally

change agreements that cover unionized employees even to increase benefits by extending

it to additional employees. The new rules could force employers into a premature "pay"

requirement. In the worst case, they would have to pay the A Penalty for all full timeemployees while still providing substantial health carp benefits to most of their employees.

5031119.1

Internal Revenue ServiceCC:PA:LPD:PR {REG-138006-12)Notice of Proposed RulemakingShared Responsibility for Employers Regarding Health CoverageMarch 15, 2013

Cash in lieu of benefits —Some employers now provide additional cash compensation in lieuof benefits to employees who work on a "project" or on an "on call" basis. These employeesmay prefer this type of compensation arrangement because they obtain health carecoverage in other ways, such as through a spouse's employer. Under Pay or Play, thecompensation structure for these employees must be changed quickly to meet the new rulesand this can disrupt current arrangements unnecessarily and to the detriment of employees.Additionally, some of these arrangements are collectively bargained and cannot be changedunilaterally by the employer.

• Recordkeeping — To ensure that accurate measurement of "full time" occurs, IT and payrollsystems must be rapidly changed to start measurement no later than May 1, 2013, for a lateFall 2013 open enrollment and a January 1, 2014, coverage effective date. Reprogrammingsystems can be difficult and time consuming and may not be wholly accomplished in thelimited time remaining —less than two months from the date of this letter.

Employers understand that they must comply with the new rules. Yet they also need the abilityto change arrangements that have been in place for many decades and to do this in an orderlymanner. There is no advantage to anyone to require disruptive change.

2. January 1, 2015 Effec#ive Date and Reasonable Good Faith Compliance in 2014

fn many circumstances, the Service has recognized the need for transition rules when newcomplicated employee benefit regulations have been put in place. For example, Section 409Awas effective January 1, 2005, final regulations were issued in 2007 and good faith compliancewas accepted until those regulations because effective. More relevant is the implementation ofthe Summary of Benefits and Coverage requirements under the ACA.

The final regulations governing the Summary of Benefits and Coverage ('SBC") were issuedFebruary 14, 2012, generally effective April 16, 2012. In recognition that implementation was amajor challenge, on March 19, 2012 the Departments issued an FAQ stating that during thefirst year of applicability, the Departments would not impose penalties on plans and issuers thatwere working diligently and in good faith to pravide the required SBC content in accordance withthe final regulations. FAQs About Affordable Care Act Implementation Part VIII (athttp://www.dol.gov/ebsa/fags/fag-aca8.html). Pay or Play is far more complex than the SBCrequirements, and may result in potentially much larger penalties for compliance errors.

We respectfully submit that the Service should provide a longer transition time forimplementation of Pay or Play. At a minimum, the effective date of any final regulations shouldnot be earlier than January 1, 2015. Additianally the Service should immediately issue aNotice that reasonable good faith compliance is allowed and accepted for 2014 for a!Iaspects of secfion 4980H. This announcement will both encourage employers to continue towork to provide coverage and tell them that they have much more than the remainder of 2013 tochange their IT and payroll systems, change compensation systems, negotiate new carriercontracts, and take other needed steps.

5031119.1


3. Collective Baraainina Contracts

The Service has in other circumstances provided special transition rules for collectively

bargained employees. To do otherwise — to require changes in compensation arrangements

that are required by collective bargaining agreements in violation of those agreements —would

not be good policy and would fail to recognize the requirements of other Federal and State

governing law.

The Service has provided a limited transition period for collectively bargained arrangements

under Pay or Play for multi-employer plans. This one exception does not recognize that, by law,

no employer can unilaterally provide additional benefits, reduce contribution rates or extend

coverage to additional employees in a bargaining group. National Labor Relations Act Sec.

8(a)(5) and 8(b)(3); see Higgins, "The Developing Labor Law Sixth Ed, Vol 1, (BNA 2012) p. 893

(Unilateral changes by an employer during the court of a collective bargaining relationship

concerning mandatory subjects of bargaining are normally regarded as per se refusal to

bargain.) Therefore, if additional transition is not provided, employers could be subject to the A

or B Penalties in situations where they have no control whatsoever over the circumstances.

We respectfully submit that the Service should provide that the new Pay or Play rules do not

disrupt existing collective bargaining agreements and that employees who are covered by

agreements in effect on the date of publication in the Federal Register of the final regulations

are excluded from the definition of "full time" employees until the earlier of the termination of

such agreements or their material modification.

C. Correction Program

The Pay or Play rules are extremely complicated and require precision in measurement.

Employers acting in good faith could err in a number of ways including, for example:

• not correctly taking infio account particular hours of non-service;

+ not correctly measuring income for the 9.5% cap, particularly with regard to projected

monthly income based on beginning of the month wage ra#es;

• mistakenly treating service providers as independent contractors and not employees; and

treating employees as variable new hires (this issue in particular lends itself to 20-20

hindsight).

The goal of the ACA is to expand coverage for employees, not to penalize employers or garner

revenue far the Fisc. Another goal is to encourage employers to continue to provide coverage.

Peter Lee, the respected leader of the California Exchange ("Covered California") has made

clear that employer coverage is critical to achieving the ACA coverage goals.

http://www.capradio. orq/articles/2013/03/05/hundreds-of-thousands-of-califorr~ians-mav-choose-

to-leave-iob-based-coverage

5031119.1


Penalizing employers who make errors instead of allowing correction will tend to driveemployers away from providing coverage. Additionally, penalizing employers instead ofallowing self-correction may encourage playing the "audit lottery" instead of correcting errorsand extending coverage.

We respectfully suggest that the Service immediately issue a Notice that aself-correctionprogram will be available under 4980H and thereafter quickly develop aself-correction program.

As for the program itself, retroactive coverage most likely would not be possible. Manyemployers obtain coverage for their employees from commercial carriers and it is very unlikelythat the carriers will allow retroactive coverage. Instead, the Service might wish to consider aprogram similar to the correction under EPCRS for missed contributions to defined contributionplans including 401(k) plans.

Under EPCRS, the employer must make contributions to the plan for mistakenly excludedemployes who should have been included. To correct for an exclusion from a 401(k) plan theemployer must contribute to the employee's account 50% of the ADP for the employee's group(HCE or NHCE) times applicable compensation plus lost earnings on the contribution. Thecontribution required for exclusion from a money purchase or profit sharing plan is the amountthat would have been contributed had there not been exclusion plus earnings. Rev. Proc 2013-12, App A.

A similar correction could be provided under 4980H with, e.g., contributions plus earnings to ahealth reimbursement account for all periods mistakenly missed. Similar to section 409Acorrection, employers would have to report to the Service: errors, the reasons for them, thesteps taken fig avoid errors in the future, and the amount involved. Reports would also have tobe made to the affected employees.

D. Technical Comments

1. New Variable Hour Hires

The measurement rules for new variable hour hires are extremely complicated and can extendfor substantial periods. Employers can be required to run at least 12 measurement periodssimultaneously: the standard measurement period and a new measurement period starting atthe beginning of each month for each new variable hire in the prior month.' Additionally, therewill be at least 12 new variable hire stability periods that run year after year for multipleemployees. Perhaps this can be done by very large employers who can invest in and properlyoperate substantial IT programs. For more modest size employers, it will be very difficult. Inany event, this process certainly will lead to errors by many employers.

In fact, if the standard measurement period does not start on the first of a month but, e.g. runs from October 15through October 14 of the following year to meet both end of the year open enrollment and the 90 day rule, therecould be at least 13 measurement periods running every year.

5031119.1


We respectfully suggest that employers be given a simpler alternative. There are certainlymany ways to simplify the rules. Here is an outline of one that is similar to the transition rulethat is allowed for 2013 measurement. Allow an employer — on a uniform basis for categories of

employees — to use a measurement period from date of hire or first day of the month after hireto the end of the coinciding standard measurement period. If the employee is full time based onthat period, then he/she will 6e full time for the ensuing standard stability period. And if theemployee is not full time based on that period, then he/she will not be full fiime for the ensuingstandard stability period. Whether or not full time during the short initial measurement period,each new variable hire would go into the standard measurement period and the standardstability period much more quickly than under the proposed regulationsZ.

2. Reasonably Expected Short Term Employment

The proposed regulations provide that only for 2014 can an employer take into account the factthat an employee will be hired on a 30 hours/week basis for a short period and, therefore, nottreat the employee as full time. Starting in.20'15, this rule is not available. We respectfullysuggest that the 2014 rule should be made permanent.

Under the 2015 rule, if an employee were hired for fewer than 90 days3 they need not be offered

coverage. But if he/she is hired for 120 days, then coverage must be offered to avoid slipping

into the A Penalty ar having to pay the penalty under Section 4980H(b) (the "B Penalty"). One

consequence is that if coverage is offered and taken, and the employee leaves after 120 days,then he/she is entitled to COBRA coverage, which may be irrelevant because coverage shouldbe available through an exchange. Another consequence is that the employee may alreadyhave coverage through an exchange and be receiving a premium subsidy so if the employeetakes the employer coverage for one month he/she will lose the subsidy and have to re-enrollwith the exchange after that month. With the 2014 rule, the Service has effectively rECOgnizedthat this churning does not extend coverage in any meaningful way. Therefore, the temporary2014 rule should be made permanent.

3. Hours Countin

At their option, employers should be able to count hours for full time status in exactly the sameway that they count hours for vesting purposes under ERISA. "there are differences betweenthe 4980H and ERISA rules and employers should not hau~ to modify existing systems toaccommodate those differences.

2 Of course, rules would be required such as, perhaps, requiring a minimum of 3 months measuremen4. These can

be worked out as the program is developed.

3 The proposed regulations are inconsistent in using three months and 90 days. This inconsistency should be

eliminated. Months are preferred for ease of administration. Either one can work; employers need to know what rule

applies.

5031119.1

Internal Revenue ServiceCC:PA:LPQ:PR (REG-138006-12)Notice of Proposed RulemakingShared Responsibility for Employers Regarding Health CoverageMarch 15, ?_013

4. Medicaid Coveraae

Employees vvho are covered by Medicaid or other government programs cannot obtain premiumsubsidies through an exchange so are not relevant for either the A or B Penalty. As a practical

matter, they have coverage and should not be in the "count" for the ACA and employercoverage. On an optional basis, employers should be able to exclude them from their count offull time. However, employers likely will not know who is covered by such programs.Employers should be allowed to require employees to notify the employer when they are so

covered and employers should be able to exclude these employees from measurement andfrom full time status.

5. 9.5% of Income and Affordabilit

To be affordable, employee contributions cannot be more than 9.5% of inGOme, and theproposed regulations provide safe harbors for determining income.

First, Box 1 1IV-2 income technically will be known only after the year ends. Unless a correctionprogram is established that allows employers to reimburse employees far amounts required inexcess of the 9.5% it appears that this safe harbor might not be useful. We respectfully proposethat employers be allowed to use as a safe harbor tree accumulated monthly income for the yearas reasonably expected to be reported in Box 1. (Accumulation is needed for variable income

such as commissions and bonuses.)

Second, we expect that a contribution program that sets a dollar premium for employee-onlycoverage ~r✓ith a limit of 9.5°l0 of income (measured under one of the safe harbors) is acceptable.For examplE, if the premium is $500/month the individual employee's contribution cap would be9.5% of his/her income for the month. We would appreciate guidance on whether a program isacceptable if, e.g., the contribufiion is 9.5% of income, the premium is $500, then thecontribution will not be greater than $500 even if this is less thin 9.5% of income.

Third, often programs set contributions for family coverage in a manner that does not break outthe contribution for employee-only. We would appreciate guidance on how the 9.5% limit isdetermined when contributions are set in that way. For example, a program may charge $500for employee only, but $1,000 for employee +spouse + 2 children. Is the contribution tested forthe 9.5% in the #amity situation $500, or is it $250 ($1,000 divided by 4)?

6. Offer of Coverage

Some unions prefer cash in lieu of benefits for all or some of their members. To engage in goodfaith bargaining, employers cannot refuse this type of request by a union. Employers should notbe penalized for failing to offer coverage in this situation. Moreover, Employers cannot gooutside the bargaining agreement and offer coverage —even at full cost — on an individual basisto members of a bargaining unit that has a cash in lieu provision.

When an employer offers coverage and ~ union prefers cash in lieu, that should be a sufficientoffer of coverage to all members of the union who receive cash in lieu under the bargaining

5031119.1


agreement. The only way that an employer can offer coverage is through the bargaining

process and if coverage is not accepted then the employer has done all that it can under

governing law --the National Labor Relations Act — to offer coverage. Additionally, the union

speaks for all of its members so when the bargaining agreement provides for cash in lieu the

union has, as a legal matter, rejected the offer of coverage on behalf of all of its members.

This situation should be recognized in the Pay or Play rules. The regulations should provide

that if there is good faith bargaining about minimum essential coverage, that is a sufficient offer

of coverage regardless of whether or not the coverage is provided through the bargaining

agreement. See, e.g., the qualified retirement plan rules in Code section 41a(b)(3)(A).

7. Temporary Staffing Agencv Employees

The common law standard, used under Pay or Play, of who is an "employee" is based on facts

and circums#antes and is uncertain in applica#ion in many instances. Therefore, Pay or Play

can apply to an employer with an unexpected (arid often retroactive) change in the

"em~loymEnt" siatus of an individual. While the preamble to the proposed regulations says that

this will be applied only in abuse situations, what constitutes "abuse" can be uncertain and

shifting.

Temporary staffing agency workers can be particularly difficult to track. They are not entered

into or paid #hrough the payroll system, but most often through accounts payable. Their hours

needed for measurement of full time status are most often maintained by the staffing agency

alone, not the entity to which they provide services. Some employers rely on staffing agencies

for many hundreds or more of these workers to supplement workforces during peak times or fir

special projects. Reclassification of these workers could increase exposure to Pay or Play

penalties causing substantial disruption of business and worker relationships.

[Intentionally left blank]

5031119.1

Internal Revenue ServiceCC: PA: LPD: PR (REG-138006- i 2)Notice of Proposed Rulem~kingShared Responsibility for Employers Regarding Health CoverageMarch 15, 2013

The solution to this issue is straightforward: when minimum essential coverage is offered to

workers by a temporary staffing agency the service recipient should not be subject to any A

Penalty, and when coverage that meets minimum value and affordability rules is provided by the

agency, again the service recipient should not be subject to the B Penalty.

Thank you for considering these comments. Please contact either of the undersigned with any

questions.

Very truly

Robert A. Blu

CAnne C. Hydorn

5031119.1

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Shared Responsibility for Emglovers Reaardinq Health Coverage

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hansonbridgett · penalty under section 4980h (the "a" penalty). this is not the only...

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