The Sec. 4980H assessable payment for large employers

Businesses need to understand the rules for counting workers and prepare now to avoid a tax penalty for failing to provide employees minimum essential health coverage.

Employers near the threshold of 50 full-time and full-time-equivalent employees (FTEs) or with a high proportion of seasonal workers should be taking measures now to record employees’ daily hours of service and other data relevant to the Sec. 4980H assessable payment for large employers regarding minimum essential health coverage. To avoid unanticipated penalties, employers also need to fully understand this major facet of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148. An employer could be liable for the penalty either by not offering coverage to its full-time employees or if any of those employees obtain coverage through a health care exchange for which they are allowed a premium tax credit.

Although the IRS has provided transition relief (Notice 2013-45 and final regulations in T.D. 9655) effectively delaying until Jan. 1, 2016, liability for the penalty for employers with between 50 and 99 FTEs (midsize employers), the penalty is being phased in for employers with 100 or more FTEs effective Jan. 1, 2015, meaning that the lookback period by which these larger employers must determine whether the provision applies to them began Jan. 1 this year (unless they elect to use a period of six consecutive calendar months, allowed in 2014 only) and thus is well underway. The penalty phase-in requires applicable employers to offer qualifying health coverage to at least 70% of their full-time employees in 2015 and 95% in subsequent years.

This article examines some of the parameters in determining whether an employer is a large employer within the meaning of Sec. 4980H(c)(2) and the transition relief and thus potentially subject to the penalty. In addition, it discusses how an applicable large employer can determine which employees need to be offered coverage and related reporting requirements.


Beginning in 2015 under transition relief, an employer is a large employer if it employed an average of at least 100 full-time employees and FTEs (beginning in 2016 for employers with between 50 and 99 FTEs) on business days each month during the preceding calendar year. A full-time employee is one who is employed on average at least 30 hours of service a week or 130 hours in a calendar month (Sec. 4980H(c)(4) and Regs. Sec. 54.4980H-1(a)(21)(ii)). An FTE is an employee or combination of employees, none of whom are full-time employees, whose hours or aggregate hours in a month equal 120.

These FTEs’ hours of service are aggregated for each calendar month (but not more than 120 hours for any employee) and the sum divided by 120 (Regs. Sec. 54.4980H-2(c)(2)). This amount, including any fraction, is added to the number of full-time employees for each month. For this purpose, all related businesses under Sec. 414(b), (c), (m), or (o) are treated as one employer (Sec. 4980H(c)(2)(C)(i)). Seasonal workers are included in both full-time employees and FTEs; however, an employer may be eligible for a seasonal-worker exception from large-employer status, described below.


The employer-employee relationship is determined under the common law standard, i.e., an employer is one for whom services are performed by the employee and who has the right to control the result of the services and the details and means by which they are performed. An employee is subject to the employer’s will and control not only as to what is done but how it is done. Hours of service include hours for which an employee is paid or entitled to be paid either for duties performed for the employer or paid leave due to vacation, holiday, illness, jury duty, etc.

Under the 130-hour monthly equivalency to 30 hours per week for defining full-time employees, employers may optionally use a weekly rule described in Regs. Sec. 54.4980H-1(a)(21)(iii). In addition, Regs. Sec. 54.4980H-3(b)(3)(i) provides methods that allow employers to calculate hours of service (including for paid leave) for full-time employees by alternative methods to actual hours, but only for nonhourly-basis employees—eight hours per day or 40 hours per week. An employer may use either method and is not required to use the same method for all nonhourly employees (Regs. Sec. 54.4980H-3(b)(3)(ii)). These methods must also be applied reasonably and consistently to employees or classifications of employees and must not have the effect of significantly understating actual hours (Regs. Sec. 54.4980H-3(b)(3)(iii)).

Note that it is possible for a non-full-time employee to work more than 120 hours in a month; in that instance, only 120 hours for the employee are included in the FTE calculation, and the employee constitutes one FTE. Some published articles have treated a month as equivalent to four weeks for totaling non-full-time employees’ weekly hours; however, it is not clear that employers can use any method for calculating FTEs other than actual hours of service in a month, which usually (except for February in a nonleap year) is a fraction more than four weeks.

Example 1. Employer A employs Employee X, who is paid hourly and who provides services four hours a day, seven days a week. Because Employee X works 28 hours a week (less than 30), he is not a full-time employee. In months with 31 days (January, March, May, July, August, October, and December), his actual hours of service are 124; however, in those months, only 120 hours are counted, and Employee X’s hours are one FTE in those months (as well as in the four months with 30 days; in February of a nonleap year, his hours are 112).

Commenters on the hours-of-service rules as proposed in Notice 2011-36 and discussed in the preamble to the final regulations have raised questions about how to count hours or determine equivalencies for employees in a variety of professions for which workers are not “on the clock” or that otherwise pose difficulties in determining hours of service, including adjunct faculty, commissioned salespeople, and airline employees. In all such instances, as a general rule and pending further guidance that may be issued, employers must use some reasonable method of crediting hours of service that does not have the effect of recharacterizing as non-full-time any employee in a position that traditionally involves more than 30 hours a week of service. The preamble contains examples of reasonable methods for these types of employees, but the examples 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 relevant facts and circumstances.


A seasonal worker is defined by Sec. 4980H(c)(2)(B)(ii) as performing labor or services on a seasonal basis, defined by the secretary of the Department of Labor (DOL) as including, but not limited to, workers covered by DOL regulations at 29 C.F.R. Section 500.20(s)(1) and retail workers employed exclusively during holiday seasons. The DOL regulations state that labor is performed on a seasonal basis where the employment pertains to or is of a kind exclusively performed at certain seasons or periods of the year and that, because of its nature, cannot be performed continuously throughout the year. A worker may be considered seasonal even if he or she moves from one seasonal activity to another throughout the year.

Regs. Sec. 54.4980H-1(a)(39) provides that employers may use any reasonable, good-faith interpretation of the statutory definition of seasonal worker or application of the DOL regulatory standard (which technically covers migrant agricultural workers) by analogy to other employment. However, there is little objective guidance on determining seasonal status. A common mistake in this area is to consider a worker who works more than 120 days in a calendar year as nonseasonal, although seasonal workers working more than 120 days could contribute to putting the exception out of reach for the employer if they, other employees, and FTEs number more than 100 during 2014 or 50 in following years.

Although seasonal workers are included in both the full-time employee and FTE calculations, an employer may qualify for an exception from the large-employer mandate if (1) the number of full-time employees and FTEs exceeds 50 for no more than 120 days (or four calendar months) in a calendar year and (2) the employees over 50 are seasonal workers (Regs. Sec. 54.4980H-2(b)(2)). The days or months need not be consecutive. Therefore, employers should be sure to designate in their hours-of-service accounting whether a worker is seasonal. Note, too, that the regulations also refer to “seasonal employees” for purposes of determining whether those employees must be offered coverage, and the definition of “seasonal employee,” discussed below, is different from the definition of “seasonal worker.”


Because the lookback period for determining large-employer status is a calendar year, if the employer has maintained proper records of hours of service, there should be little difficulty in establishing that status. (Note that, under transition relief described in Section XV.D.3 of the preamble to the final regulations, for 2015 only, employers may determine their applicable large-employer status by reference to any six consecutive months in 2014.) A more complex method of counting hours of service during a current year comes into play, however, once the employer determines that it is a large employer and is liable for an assessable payment (which is based on the current-year number of full-time employees), or in determining whether it must offer an employee minimum essential coverage, particularly one whose hours of service are variable or uncertain. Accordingly, the lookback measurement methods under Regs. Sec. 54.4980H-3(d), described below, are strictly to be used for determining and calculating liability under Secs. 4980H(a) and (b) and determining whether to offer an employee minimum essential coverage and not for determining status as a large employer.

Measurement period. For existing or ongoing employees, an applicable large employer determines employees’ status as full-time by looking back over a standard measurement period at their employment history. Applicable large employers may determine when their standard measurement period begins and ends, as long as it is applied uniformly for all employees in the same category. If, after examining an employee’s standard measurement period, an employer determines the employee averaged 30 hours a week or more, this employee must be treated as a full-time employee for a subsequent stability period.

Stability period. The employer must offer a full-time employee health coverage during the subsequent stability period (Regs. Sec. 54.4980H-3(d)(1)(iii)). If an employee did not average at least 30 hours of service per week during the standard measurement period, the applicable large employer does not need to treat the employee as full-time during the subsequent stability period, provided that the stability period is no longer than the standard measurement period.

Once employees are determined to be full-time or non-full-time, their status is locked in for the subsequent stability period. The rules are slightly different for new employees.

New full-time employees. For new employees who are reasonably expected to be full-time employees when hired and are not variable-hour or seasonal employees as described below, an applicable large employer must offer them coverage by the first day of the fourth full calendar month of employment (Regs. Sec. 54.4980H-3(d)(2)(iii)).

New variable-hour employees. For new employees whose service hours are expected to vary and whose status is therefore uncertain, an applicable large employer is allowed to use an initial measurement period to determine full-time or non-full-time status. This initial measurement period can be between three and 12 months long. If the employee averaged at least 30 service hours per week during the initial measurement period, the employee is considered a full-time employee and must be offered health care coverage, or the employer may be subject to the Sec. 4980H payment. If the employee did not average at least 30 service hours per week during the initial measurement period, the applicable large employer is not required to treat him or her as a full-time employee during the subsequent stability period.

An applicable large employer must also test new variable-hour employees under the same time and conditions as other, ongoing employees. Sometimes these measurement periods will overlap.

Example 2. General Retail Co., an applicable large employer, uses a 12-month initial measurement period beginning on the date of employment and hires Ashley on May 10, 2015. Ashley’s initial measurement period will run from May 10, 2015, through May 9, 2016. General Retail Co. measures its ongoing employees for full-time status from Oct. 15 through Oct. 14 of the following year. General Retail Co. must test Ashley’s full-time status under the initial measurement period starting on May 10, 2015, through May 9, 2016, and also measure her employment status under its standard measurement period from Oct. 15, 2015, through Oct. 14, 2016. These same rules apply to variable-hour employees who are also seasonal employees, are employed through a staffing agency, or are temporary employees.

Seasonal employees. A seasonal employee for purposes of offering coverage or determining the penalty for not doing so (not to be confused with a seasonal worker for purposes of determining large employer status or the seasonal-worker exception, above) is one whose customary annual employment is six months or less (Regs. Sec. 54.4980H-1(a)(38)).


Examples 11, 12, and 15 of Regs. Sec. 54.4980H-3(d)(5) provide guidance on how these rules can be applied to an assortment of variable-hour employees. In Example 11, an employer that uses a 12-month initial measurement period for new seasonal employees hires a ski instructor who is expected to be employed for four months. Consequently, the employer may treat the ski instructor as a seasonal employee during the 12-month initial measurement period.

In Example 12, the employer is in the trade or business of providing temporary workers to unrelated clients and uses a 12-month initial measurement period for new variable-hour employees. At the beginning of the employee’s start date, the employer reasonably expects the employee to be offered assignments at a particular client for 40 hours of service per week for a period of less than 13 weeks. For each employee, there are typically periods where the employer has no assignment for him or her. The employer cannot reasonably predict whether the employee will average 30 hours of service per week, and the employer can treat him or her as a variable-hour employee during the initial measurement period.

In Example 15, the employer hires an employee to fill in for someone else and to provide additional support as needed. The employee is reasonably expected to average more than 30 hours of service per week while assigned to an initial specific project, but the employer also expects subsequent projects to be of unpredictable duration with gaps between them. The employer cannot reasonably predict whether the employee will average over 30 hours of service per week for the year, so the employer may treat the employee as a variable-hour employee for the initial measurement period. 


The regulations also permit an applicable large employer to use an administrative period before the start of a stability period that is not to last longer than 90 days for ongoing employees (Regs. Sec. 54.4980H-3(d)(1)(vi)) or new variable-hour, seasonal, or part-time workers (Regs. Sec. 54.4980H-3(d)(3)(vi)). The 90-day restriction applies to the aggregate number of days from employees’ start date to when they are offered coverage under an applicable large employer’s health plan. This period excludes any of an employee’s measurement periods, but the measurement and administrative periods combined cannot “extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee’s start date” (Regs. Sec. 54.4980H-3(d)(3)(vi)(B)). In other words, an initial measurement period and administrative period combined cannot extend beyond the last day of the calendar month immediately following the month of an employee’s one-year anniversary.

Example 3. Electrical Engineering Co. hires Bob, a variable-hour employee, on May 10, 2015, and Bob’s initial measurement period runs from his hire date to May 9, 2016. During this period, Bob averages 30 or more service hours a week. Following Bob’s initial measurement period and administrative period, Electrical Engineering Co. offers coverage to Bob for a stability period that begins July 1, 2016, and runs through June 30, 2017. Electrical Engineering Co. is not subject to a Sec. 4980H penalty for violating the limitation on the length of the initial measurement period and the administrative period because the aggregate amount of time of Bob’s initial measurement period and administrative period does not extend beyond the last day of the first calendar month after Bob’s one-year employment anniversary.


Sec. 6056 requires applicable large employers to submit information to the IRS regarding the health care coverage they offer or do not offer to their full-time employees. For each calendar year, an employer is required to report information including:

  • Whether it offered its full-time employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan;
  • The number of full-time employees for each month during the calendar year; and
  • The number of months, if any, during which they and any dependents were covered under an eligible sponsored plan.

If an employer certifies that it provided employees the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, it must also report:

  • The length of any waiting period with respect to that coverage;
  • The months the coverage was available during the calendar year;
  • The monthly premium for the lowest-cost option in each of the plan’s enrollment categories; and
  • The employer’s share of the total allowed costs of plan benefits.

Although the IRS has delayed the reporting requirements until 2015, it is encouraging employers to voluntarily comply with the reporting requirements in 2014 to develop their reporting systems.

An applicable large employer that fails to comply with the Sec. 6056 reporting requirements may be subject to penalties for failure to file a correct information return under Sec. 6721 and failure to file correct payee statements under Sec. 6722. The first Sec. 6056 returns required to be filed are for the 2015 calendar year and must be filed no later than Feb. 29, 2016, or March 31, 2016, if filed electronically. In final regulations issued in March 2014 (T.D. 9660), the IRS provided a consolidated form for reporting to the IRS and employees and avoiding duplicative reporting. In T.D. 9661, also issued in March 2014, the IRS allowed a simplified reporting method for large employers who certify that they provide qualifying coverage to at least 98% of the employees on whom they are reporting. The IRS also provided relief from penalties for statements provided in 2016 for employers that make a good-faith effort to comply.


Clearly, compliance with the large-employer assessable payment provisions requires extensive and, for many employers, new systems of accounting and reporting. For employers, especially those uncertain whether they meet the threshold requirement of full-time employees and FTEs, now is the time to set these systems in place and to establish contingency plans for offering full-time employees minimum essential coverage if they do not already do so. Not only will employers need to record hours of service with an eye to the requirement, but they will also need to assess employees’ anticipated work schedule. Employers that expect to have large-employer status will need to establish and incorporate into their payroll practices the new standard measurement, stability, and optional administrative period methods and pay close attention to whether workers’ assignments are variable-hour or seasonal.

More About PPACA and Employers

Previous articles in the JofA and The Tax Adviser have discussed the large-employer health coverage penalty more broadly (see “Tax Clinic: Shared-Responsibility Payment: Minimum Value Requirement,” The Tax Adviser, Aug. 2013, page 502; also “Small Businesses Struggle to Navigate Provisions of the Health Care Law,” JofA, Jan. 2013, page 38; and “Planning for ‘Play or Pay,’JofA, June 2013, page 58). See these articles also for the definition of minimum essential coverage, eligibility for the premium tax credit or cost-sharing reduction, calculation of the penalty, and related matters. In addition, IRS guidance, notably final regulations released in February 2014 (T.D. 9655), covers many facets of large-employer status and classification of employees under Sec. 4980H and transition relief not described here.


Employers need to determine whether they are large employers potentially liable for the Sec. 4980H assessable payment for failing to provide minimum essential health coverage by tracking their full-time and full-time-equivalent employees’ (FTEs) hours or equivalencies. Transition relief for 2015 allows a lookback period of any six consecutive months in 2014, but otherwise, the determination is made by using a calendar-year lookback method.

For 2015, the requirement is phased in for employers with 100 or more full-time employees and FTEs, who must offer coverage to at least 70% of full-time employees. For 2016 and after, large employers are those with 50 or more full-time employees and FTEs, and they must offer coverage to at least 95% of full-time employees.

Employers may qualify for the exemption from the large-employer mandate if their full-time employees plus FTEs exceed 50 for 120 days or less in a calendar year and the employees over 50 are seasonal workers.

Once employers determine they are large employers, a still more complex system of rules may be required to determine whether employees are full-time for purposes of offering coverage or determining the penalty amount, especially for variable-hour and seasonal employees. Final regulations provide rules for measurement, administrative, and stability periods.

Employers must also report to employees and to the IRS information including the number of full-time employees during each calendar year, whether those employees were offered minimum essential coverage, and the number of months the employees and their dependents were covered.

Benjamin Pruett ( ) works in the Tax Department at Cohen & Co. in Cleveland.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at or 919-402-4434.


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