Interest rates: underpayment and overpayments. The rates for interest determined under section 6621 of the code for the calendar quarter beginning January 1, 2016, will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for the underpayments, and 5 percent for large corporation underpayments. The rate of interest paid on the portion of a corporation overpayment exceeding $10,000 will be 0.5 percent.

The Notice provides a list of changes in plan qualification requirements to be used by plan sponsors submitting determination letter applications for plans during the period beginning February 1, 2016 and ending January 31, 2017.

This notice sets forth updates on the corporate bond monthly yield curve, the corresponding spot segment rates for December 2015 used under § 417(e)(3)(D), the 24-month average segment rates applicable for December 2015, and the 30-year Treasury rates. These rates reflect the application of § 430(h)(2)(C)(iv), which was added by the Moving Ahead for Progress in the 21st Century Act, Public Law 112–141 (MAP–21) and amended by section 2003 of the Highway and Transportation Funding Act of 2014 (HATFA).

This notice provides guidance on the application of the decision in Obergefell v. Hodges, 576 U.S. ___, 135 S.Ct. 2584 (2015), to retirement plans qualified under section 401(a) of the Internal Revenue Code (Code) and to health and welfare plans, including cafeteria plans under section 125 of the Code.

This notice provides further guidance on the application of various provisions of the Affordable Care Act (ACA) to employer-provided health coverage. The notice addresses, among other topics: (1) application of ACA market reform provisions to health reimbursement arrangements and certain other forms of employer-provided health coverage; (2) impact of HRA contributions, employer flex contributions, opt-out payments, and fringe benefit payments under certain federal statutes on determination of the employee’s required contribution for purposes of §§ 36B and 5000A, and for any related consequences under § 4980H; (3) clarification of how §§ 4980H, 6055 and 6056 apply to government entities and to certain forms of government-provided health coverage; and (4) application of the COBRA continuation coverage rules to unused amounts in a health flexible spending arrangement (health FSA) carried over and available in later years.

Serves notice to potential donors of a stipulated decision by the United States Tax Court in declaratory judgment proceedings under Section 7428.

This notice provides further guidance on the application of various provisions of the Affordable Care Act (ACA) to employer-provided health coverage. The notice addresses, among other topics: (1) application of ACA market reform provisions to health reimbursement arrangements and certain other forms of employer-provided health coverage; (2) impact of HRA contributions, employer flex contributions, opt-out payments, and fringe benefit payments under certain federal statutes on determination of the employee’s required contribution for purposes of §§ 36B and 5000A, and for any related consequences under § 4980H; (3) clarification of how §§ 4980H, 6055 and 6056 apply to government entities and to certain forms of government-provided health coverage; and (4) application of the COBRA continuation coverage rules to unused amounts in a health flexible spending arrangement (health FSA) carried over and available in later years.

Section 6621 of the Internal Revenue Code establishes the interest rates on overpayments and underpayments of tax. Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.”

See section 6621(c) and section 301.6621–3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621–3 are generally effective for periods after December 31, 1990.

Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter. Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after that month. Section 6621(b)(2)(B) provides that in determining the addition to tax under section 6654 for failure to pay estimated tax for any taxable year, the federal short-term rate that applies during the third month following the taxable year also applies during the first 15 days of the 4th month following the taxable year. Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during that month by the Secretary in accordance with section 1274(d), rounded to the nearest full percent (or, if a multiple of 1/2 of 1 percent, the rate is increased to the next highest full percent).

Notice 88–59, 1988–1 C.B. 546, announced that in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

The federal short-term rate determined in accordance with section 1274(d) during October 2015 is the rate published in Revenue Ruling 2015–22, 2015–44 IRB 610 to take effect beginning November 1, 2015. The federal short-term rate, rounded to the nearest full percent, based on daily compounding determined during the month of October 2015 is 0 percent. Accordingly, an overpayment rate of 3 percent (2 percent in the case of a corporation) and an underpayment rate of 3 percent are established for the calendar quarter beginning January 1, 2016. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning January 1, 2016 is 0.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning January 1, 2016, is 5 percent. These rates apply to amounts bearing interest during that calendar quarter.

The 3 percent rate also applies to estimated tax underpayments for the first calendar quarter in 2016.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of this Revenue Ruling. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 57, 59, and 63 of Rev. Proc. 95–17, 1995–1 C.B. 611, 613, and 617.

Annual interest rates to be compounded daily pursuant to section 6622 that apply for prior periods are set forth in the tables accompanying this revenue ruling.

The principal author of this revenue ruling is Deborah Colbert-James of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Colbert-James at (202) 317-3400 (not a toll-free call).

This notice contains the 2015 Cumulative List of Changes in Plan Qualification Requirements (2015 Cumulative List) described in section 4 of Rev. Proc. 2007–44, 2007–2 C.B. 54. The 2015 Cumulative List is to be used by plan sponsors and practitioners submitting determination letter applications for plans during the period beginning February 1, 2016 and ending January 31, 2017.

Plans using this Cumulative List will primarily be single employer individually designed defined contribution plans and single employer individually designed defined benefit plans that are in Cycle A. Generally an individually designed plan is in Cycle A if the last digit of the employer identification number of the plan sponsor is 1 or 6.

The list of changes in section IV of this notice does not extend the deadline by which a plan must be amended to comply with any statutory, regulatory, or guidance changes. The general deadline for timely adoption of an interim or discretionary amendment can be found in section 5.05 of Rev. Proc. 2007–44.

Rev. Proc. 2007–44 sets forth procedures for issuing opinion, advisory, and determination letters and describes the five-year remedial amendment cycle for individually designed plans and the six-year remedial amendment cycle for pre-approved plans. In addition, section 5.05 of Rev. Proc. 2007–44 provides the deadline for timely adoption of an interim amendment or discretionary amendment.

Under section 4 of Rev. Proc. 2007–44, the Internal Revenue Service (the Service) announced its intention to annually publish a Cumulative List to identify statutory, regulatory, and guidance changes that must be taken into account in submissions by plan sponsors to the Service requesting opinion, advisory, and determination letters whose submission period begins on February 1st following issuance of the Cumulative List.

In Notice 2014–77, 2014–52 I.R.B. 974, the Service published the 2014 Cumulative List of Changes in Plan Qualification Requirements (2014 Cumulative List).^[1]

This notice relates to the determination letter program for individually designed plans eligible for Cycle A. In accordance with Rev. Proc. 2007–44, the Service will start accepting determination letter applications for Cycle A individually designed plans beginning on February 1, 2016. The 12-month submission period for Cycle A plans will end on January 31, 2017.

The 2015 Cumulative List, set forth in section IV of this notice, informs plan sponsors of issues the Service has specifically identified for review in determining whether a plan filing in Cycle A has been properly updated. Specifically, the 2015 Cumulative List reflects law changes under the Pension Protection Act of 2006 (PPA ’06), Pub. L. 109–280; the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), Pub. L. 110–458; the Small Business Jobs Act of 2010 (SBJA), Pub. L. 111–240; the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA 2010), Pub. L. No. 111–192; the Moving Ahead for Progress in the 21^st Century Act (MAP–21), Pub. L. 112–141; the American Taxpayer Relief Act of 2012 (ATRA), Pub. L. 112–240; the Highway and Transportation Funding Act of 2014 (HATFA), Pub. L. No. 113–159; the Cooperative and Small Employer Charity Pension Flexibility Act (CSEC Act), Pub. L. 113–97; the Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113–235; and the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, Pub. L. 114–41.

Except as provided below, the Service will not consider in its review of any determination letter application for the submission period that begins February 1, 2016, any:

However, in order to be qualified, a plan must comply with all relevant qualification requirements, not just those on the 2015 Cumulative List.

Terminating plans must include all law changes in effect at the time of termination. See section 8 of Rev. Proc. 2007–44 regarding plan termination.

The following list consists of statutory provisions and associated guidance that reflect changes to plan qualification requirements. The Service has identified below the plan qualification requirements that differ from those that were on the 2014 or earlier Cumulative Lists as “(New).”

Items from the 2010 Cumulative List have been deleted from the 2015 Cumulative List. Thus, the 2015 Cumulative List contains the plan qualification requirements in the 2011, 2012, 2013 and 2014 Cumulative Lists, as well as additional 2015 plan qualification requirements. The deletions have been made to enhance the utility of the cumulative list, by removing items that would have been previously reviewed in the case of a plan that was submitted during the second Cycle A submission period (February 1, 2011 – January 31, 2012). However, if a plan has not been previously reviewed for items on earlier cumulative lists, the items from the earlier cumulative lists must be taken into account. These items can be found in the 2010 Cumulative List, Notice 2010–90, 2010–52 I.R.B. 909.

The principal author of this notice is Maxine Terry of the Office of Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this announcement, contact Ms. Terry at (202) 317-4102 (not a toll-free number).

This notice provides guidance on the corporate bond monthly yield curve, the corresponding spot segment rates used under § 417(e)(3), and the 24-month average segment rates under § 430(h)(2) of the Internal Revenue Code. In addition, this notice provides guidance as to the interest rate on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning before 2008 and the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I).

Generally, except for certain plans under sections 104 and 105 of the Pension Protection Act of 2006 and CSEC plans under § 414(y), § 430 of the Code specifies the minimum funding requirements that apply to single-employer plans pursuant to § 412. Section 430(h)(2) specifies the interest rates that must be used to determine a plan’s target normal cost and funding target. Under this provision, present value is generally determined using three 24-month average interest rates (“segment rates”), each of which applies to cash flows during specified periods. To the extent provided under § 430(h)(2)(C)(iv), these segment rates are adjusted by the applicable percentage of the 25-year average segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins.^[7] However, an election may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates.

Notice 2007–81, 2007–44 I.R.B. 899, provides guidelines for determining the monthly corporate bond yield curve, and the 24-month average corporate bond segment rates used to compute the target normal cost and the funding target. Consistent with the methodology specified in Notice 2007–81, the monthly corporate bond yield curve derived from November 2015 data is in Table I at the end of this notice. The spot first, second, and third segment rates for the month of November 2015 are, respectively, 1.76, 4.15, and 5.13.

The 24-month average segment rates determined under § 430(h)(2)(C)(i) through (iii) must be adjusted pursuant to § 430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates. For plan years beginning before 2018, the applicable minimum percentage is 90% and the applicable maximum percentage is 110%. The 25-year average segment rates for plan years beginning in 2014, 2015, and 2016 were published in Notice 2013–58, 2013–40 I.R.B. 294, Notice 2014–50, 2014–40 I.R.B. 590, and Notice 2015–61, 2015–39 I.R.B. 408, respectively.

The three 24-month average corporate bond segment rates applicable for December 2015 without adjustment for the 25-year average segment rate limits are as follows:

Based on § 430(h)(2)(C)(iv), the 24-month averages applicable for December 2015 adjusted to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates, are as follows:

Generally for plan years beginning after 2007, § 431 specifies the minimum funding requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limitation described in § 431(c)(6)(A), based on the plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. Notice 88–73, 1988–2 C.B. 383, provides guidelines for determining the weighted average interest rate. The rate of interest on 30-year Treasury securities for November 2015 is 3.03 percent. The Service determined this rate as the average of the daily determinations of yield on the 30-year Treasury bond maturing in August 2045 determined each day through November 10, 2015 and the yield on the 30-year Treasury bond maturing in November 2045 determined each day for the balance of the month. For plan years beginning in the month shown below, the weighted average of the rates of interest on 30-year Treasury securities and the permissible range of rate used to calculate current liability are as follows:

In general, the applicable interest rates under § 417(e)(3)(D) are segment rates computed without regard to a 24-month average. Notice 2007–81 provides guidelines for determining the minimum present value segment rates. Pursuant to that notice, the minimum present value segment rates determined for November 2015 are as follows:

The principal author of this notice is Tom Morgan of the Office of the Associate Chief Counsel (Tax Exempt and Government Entities). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this notice, contact Mr. Morgan at 202-317-6700 or Tony Montanaro at 202-317-8698 (not a toll-free number).

This notice provides guidance on the application of the decision in Obergefell v. Hodges, 576 U.S. ___, 135 S.Ct. 2584 (2015), to retirement plans qualified under section 401(a) of the Internal Revenue Code (Code) and to health and welfare plans, including cafeteria plans under section 125 of the Code. This guidance relates solely to the application of federal tax law with respect to same-sex spouses.

Notice 2014–19 is amplified.

No inference should be drawn from this notice as to the application of any law other than federal tax law, including the application of any provisions of the Constitution of the United States or Title VII of the Civil Rights Act of 1964,^[13] to the treatment of same-sex spouses under employee benefit plans.

The principal authors of this notice are Jeremy Lamb and Shad Fagerland of the Office of Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding the qualified retirement plan aspects of this notice, contact Mr. Lamb at (202) 317-6799 (not a toll-free number) and regarding the health and welfare plan aspects of this notice, contact Mr. Fagerland at (202) 317-5500 (not a toll-free number).

This notice provides further guidance on the application of various provisions of the Affordable Care Act^[14] to employer-provided health coverage. Part II of this notice applies to provisions within the jurisdiction of the Treasury Department (Treasury) and the Internal Revenue Service (IRS), the Departments of Health and Human Services (HHS), and Labor (DOL) (collectively the Departments). Parts III through VI of this notice apply only to provisions of the Internal Revenue Code, and accordingly the guidance on these parts is provided solely by Treasury and IRS. For purposes of this notice, references to sections refer to sections of the Internal Revenue Code unless otherwise indicated.

Part II of this notice provides guidance on the application of the market reforms^[15] that apply to group health plans under the Affordable Care Act (the market reforms) to various types of employer health care arrangements. The notice covers, among other health care arrangements: (1) health reimbursement arrangements (HRAs), including HRAs integrated with a group health plan, and similar employer-funded health care arrangements, and (2) group health plans under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, such as a reimbursement arrangement described in Revenue Ruling 61–146, 1961–2 CB 25, or an arrangement under which the employer uses its funds to directly pay the premium for an individual health insurance policy covering the employee (collectively, an employer payment plan). This notice supplements the guidance provided in Notice 2013–54, 2013–40 IRB 287; FAQs about Affordable Care Act Implementation (Part XXII) issued by the Department of Labor on November 6, 2014; Notice 2015–17, 2015–14 IRB 845; and final regulations implementing the market reform provisions of the ACA published in the Federal Register on November 18, 2015, 80 FR 72192. DOL and HHS have reviewed Part II of this notice and have advised Treasury and the IRS that they agree with this guidance.

Part III of this notice clarifies certain aspects of the employer shared responsibility provisions of § 4980H, including the identification of employee contributions when employers offer HRAs, flex credits, opt-out payments, or fringe benefit payments required under the McNamara-O’Hara Service Contract Act or other similar laws, the application of the adjusted 9.5 percent affordability threshold under § 36B(c)(2)(i)(II) to the safe harbor provisions under § 4980H, and the employer status of certain entities for § 4980H purposes.

Part IV of this notice clarifies certain aspects of the application to government entities of § 4980H, the information reporting provisions for applicable large employers under § 6056, and application of the rules for health savings accounts (HSAs) to persons eligible for benefits administered by the Department of Veterans Affairs (VA).

Part V of this notice clarifies the application of the COBRA continuation coverage rules to unused amounts in a health flexible spending arrangement (health FSA) carried over and available in later years pursuant to Notice 2013–71, 2013–47 IRB 532, and conditions that may be put on the use of carryover amounts.

Part VI of this notice addresses relief from penalties under §§ 6721 and 6722 that has been provided for employers that make a good faith effort to comply with the requirements under § 6056 to report information about offers made in calendar year 2015.

Question 7: How are contributions to an HRA taken into account for purposes of determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan under §§ 36B and 5000A and any related consequences under § 4980H(b) (including application of the affordability safe harbors in § 54.4980H–5(e)(2))?

Answer 7: An applicable large employer (as defined in § 54.4980H–1(a)(4)) may be subject to an assessable payment under § 4980H(b) for any month for which a full-time employee (as defined in § 54.4980H–1(a)(21)) has received a premium tax credit under § 36B in connection with enrollment in a qualified health plan through the Marketplace. Under § 36B(c)(2)(C), an employee is not eligible for the premium tax credit for any month for which the employee is eligible for coverage under an eligible employer-sponsored plan that provides minimum value and is affordable (or for any month for which the employee enrolls in an eligible employer-sponsored plan, regardless of whether the plan is affordable or provides minimum value). For this purpose, an offer of coverage is affordable if the employee’s required contribution (within the meaning of § 5000A(e)(1)(B)) for coverage under the plan is 9.5 percent (as adjusted annually) or less of the employee’s household income. See § 36B(c)(2)(C)(II).

The amount of an employee’s required contribution for purposes of determining affordability under § 36B is determined under § 5000A and the related regulations. Section 5000A(e)(1)(B)(i) provides that the term “required contribution” means, in the case of an individual eligible to purchase minimum essential coverage consisting of coverage through an eligible employer-sponsored plan, the portion of the annual premium that would be paid by the individual (without regard to whether paid through salary reduction or otherwise) for self-only coverage. As a result, the determination of whether an applicable large employer has made an offer of affordable, minimum value coverage under an eligible employer-sponsored plan for purposes of any related consequences under § 4980H(b) generally is based on the standards set forth in §§ 5000A and 36B.

The treatment of employer contributions to HRAs for purposes of determining the employee’s required contribution is determined under the rules provided in §§ 1.5000A–3(e)(3)(ii)(D) and 1.36B–2(c)(v)(A)(5). Under those rules, amounts made available for the current plan year under an HRA that an employee may use to pay premiums for an eligible employer-sponsored plan, or that an employee may use to pay premiums for an eligible employer-sponsored plan and also may use for cost-sharing and/or for other health benefits not covered by that plan in addition to premiums, are counted toward the employee’s required contribution (and thus reduce the dollar amount of that required contribution) if the HRA would be integrated, as that term is used in Notice 2013–54 or in any successor published guidance, with the eligible employer-sponsored plan for an employee enrolled in the plan.

Employer contributions to an HRA count toward an employee’s required contribution only to the extent the amount of the employer’s annual contribution to the HRA is required under the terms of the arrangement or otherwise determinable within a reasonable time before the employee must decide whether to enroll in the eligible employer-sponsored plan. Sections 1.5000A–3(e)(3)(ii)(D) and 1.36B–2(c)(v)(A)(5). A contribution that meets this requirement relates to the immediately subsequent period of coverage for which the employee could enroll and use the HRA contribution. For purposes of § 4980H(b) and the related reporting under § 6056 (Form 1095–C, Employer-Provided Health Insurance Offer and Coverage), the employer contribution to an HRA (and any resulting reduction in the employee contribution) is treated as made ratably for each month of the period to which it relates.

Section 54.4980H–5(e)(2) provides three affordability safe harbors for purposes of § 4980H(b), but those safe harbors relate to the calculation of the employee’s household income and not the calculation of the employee’s required contribution. For purposes of applying those safe harbors to determine whether an offer of coverage is affordable, the treatment of employer contributions to an HRA is consistent with the treatment of those contributions for purposes of determining whether coverage is affordable under §§ 5000A and 36B(c)(2)(C)(II) as described above.

Question 8: How are employer flex contributions to a cafeteria plan taken into account for purposes of determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan under §§ 36B and 5000A and any related consequences under § 4980H(b) (including application of the affordability safe harbors in § 54.4980H–5(e)(2))?

Answer 8: As discussed in Q&A–7, the affordability of an employer’s offer of eligible employer-sponsored coverage for purposes of §§ 36B and 5000A, and any related consequences under § 4980H(b) (including under the § 54.4980H–5(e)(2) affordability safe harbors), depends on whether the employee’s required contribution exceeds the applicable required contribution percentage of household income (under §§ 36B and 5000A) or wages (under the § 4980H affordability safe harbors). As provided in §§ 1.5000A–3(e)(3)(ii)(A) and 1.36B–2(c)(3)(v)(A)(1), an employee’s required contribution is the portion of the annual premium that the employee must pay for self-only coverage (whether by salary reduction or otherwise).

Under a § 125 cafeteria plan, the employee’s enrollment in a group health plan generally is funded by salary reduction but may also be funded by employer flex contributions. Whether these employer flex contributions reduce the amount of an employee’s required contribution depends on the nature of the available flex contribution. Specifically, the amount of the employer contribution reduces the employee’s required contribution if the amount constitutes a “health flex contribution” under §§ 1.5000A–3(e)(3)(ii)(E) and 1.36B–2(c)(3)(v)(A)(6). Sections 1.5000A–3(e)(3)(ii)(E) and 1.36B–2(c)(v)(A)(6) provide that an amount is a health flex contribution if (1) the employee may not opt to receive the amount as a taxable benefit, (2) the employee may use the amount to pay for minimum essential coverage, and (3) the employee may use the amount exclusively to pay for medical care, within the meaning of § 213. For purposes of § 4980H(b) and the related reporting under § 6056 (Form 1095–C), a health flex contribution is treated as made ratably for each month of the period to which it relates.

An employer flex contribution that is not a health flex contribution does not reduce an employee’s required contribution. Consistent with §§ 1.5000A–3(e)(3)(ii)(E) and 1.36B–2(c)(v)(A)(6), this means, for example, that if an employer flex contribution that is available to pay for health care is also available to pay for any non-health care benefits under the § 125 cafeteria plan (such as dependent care or group term life insurance), that contribution is not a health flex contribution and, as a result, does not reduce the required employee contribution. Similarly, an employer flex contribution that is available to pay for health care but also could be received as cash is not a health flex contribution and does not reduce the employee’s required contribution. (See Q&A–9, however, concerning treatment of amounts that are not available to pay for coverage under an eligible employer-sponsored health plan and are available only if the employee declines that coverage.)

The treatment of non-health flex contributions differs from the treatment of health flex contributions and contributions to HRAs discussed in Q&A–7 of this notice because, as explained in the preamble to the final regulations under § 5000A, the appropriate measure of an employee’s required contribution is the amount of compensation that the employee could apply to something other than health-related expenses that the employee must forgo to obtain coverage under the employer’s health plan.^[18] Thus, if an employer provides employees with an HRA contribution or a health flex contribution that may be used only to pay health expenses, the employee’s cost of coverage (the amount of salary or other non-health benefits that the employee must forgo to obtain coverage under the employer’s health plan) is reduced by the amount of the health flex contribution or HRA contribution. In that case, it is fair to assume that the employee would use the health flex contribution or HRA contribution to pay for the employer’s health coverage (because the health flex contribution or HRA contribution can be used only for health benefits), and if the employee does not use it for that purpose the employee does not gain any other economic benefit. Therefore, the employee’s required contribution is equal to the amount that the employer otherwise requires the employee to pay for health coverage, reduced by the amount of the health flex contribution or HRA contribution.

If, however, the employer provides an employee with a flex contribution that may be used to pay health expenses but also may be used for non-health benefits (that is, a non-health flex contribution), an employee who elects coverage under the employer’s health plan must forgo the non-health benefits in order to take the health coverage. Because a non-health flex contribution (unlike a health flex contribution or HRA contribution) may be used for benefits other than health benefits, it is not appropriate to assume that the employee would use the non-health flex contribution to pay for health coverage; the employee might choose to use that flex contribution for another non-health benefit. Accordingly, the employee’s required contribution in this case is equal to the stated amount the employee must pay for health coverage (whether that amount is paid by the employee in the form of a flex contribution, a salary reduction, or otherwise) and is not reduced by the non-health flex contribution.

Solely for purposes of § 4980H(b) and solely for coverage for plan years beginning before January 1, 2017, an employer flex contribution that is not a health flex contribution because it may be used for non-health benefits (including non-taxable benefits and/or cash or another taxable benefit), but that may be used by the employee towards the amount the employee is otherwise required to pay for the health coverage, will be treated as reducing the amount of an employee’s required contribution. This relief is not available with respect to a flex contribution arrangement offering non-health benefits that is adopted after December 16, 2015 or that substantially increases the amount of the flex contribution after December 16, 2015 (a “non-relief-eligible flex contribution arrangement”). For this purpose, a flex contribution arrangement will be treated as adopted after December 16, 2015 unless (1) the employer offered the flex contribution arrangement (or a substantially similar flex contribution arrangement) for a plan year including December 16, 2015; (2) a board, committee, or similar body or an authorized officer of the employer specifically adopted the flex contribution arrangement before December 16, 2015; or (3) the employer had provided written communications to employees on or before December 16, 2015 indicating that the flex contribution arrangement would be offered to employees at some time in the future.

In addition, solely for coverage for plan years beginning before January 1, 2017, an employer may reduce the amount of the employee’s required contribution by the amount of a non-health flex contribution (other than a flex contribution made under a non-relief-eligible flex contribution arrangement) for purposes of information reporting under § 6056 (line 15 of Form 1095–C). Because treating a non-health flex contribution as reducing an employee’s required contribution may affect the employee’s eligibility for the premium tax credit under § 36B, employers are encouraged not to reduce the amount of the employee’s required contribution by the amount of a non-health flex contribution for purposes of information reporting under § 6056. If an employee’s required contribution is reported in this manner (that is, without reduction for the amount of a non-health flex contribution) and the employer is contacted by the IRS concerning a potential assessable payment under § 4980H(b) relating to the employee’s receipt of a premium tax credit, the employer will have an opportunity to respond and show that it is entitled to the relief described in this Q&A–8 to the extent that the employee would not have been eligible for the premium tax credit if the required employee contribution had been reduced by the amount of the non-health flex contribution or to the extent that the employer would have qualified for an affordability safe harbor under § 54.4980H–(4)(e)(2) if the required employee contribution had been reduced by the amount of the non-health flex contribution. See also Q&A–26 for certain relief with respect to employer information reporting under § 6056.

For individual taxpayers, the rules in §§ 1.5000A–3(e)(3)(ii)(E) and 1.36B–2(c)(3)(v)(A)(6) apply for months beginning after December 31, 2013, as provided in those regulations. Accordingly, an employer non-health flex contribution, as illustrated in Example 2 and Example 3 of this Q&A–8, does not reduce the amount of an employee’s required contribution for purposes of § 5000A and for determining eligibility for the premium tax credit under § 36B.

Nothing in this notice, including this Q&A–8, modifies the guidance in Notice 2012–40 treating flex contributions under a health flexible spending account (health FSA) that an employee may elect to receive as cash or a taxable benefit as a salary reduction contribution for purposes of the limit on salary reduction contributions to health FSAs under § 125(i). See also the definition of “employer flex credits” in Prop. Treas. Reg. § 1.125–5(b).

Question 9: How are employer payments that are available only if an employee declines coverage under an eligible employer-sponsored plan taken into account for purposes of determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan under §§ 36B and 5000A and any related consequences under § 4980H(b) (including application of the affordability safe harbors in § 54.4980H–5(e)(2))?

Answer 9: As discussed in Q&As–7 and 8, the affordability of an employer’s offer of eligible employer-sponsored coverage for purposes of any related consequences under § 4980H(b) (including under the § 54.4980H–5(e)(2) affordability safe harbors) depends on whether the employee’s required contribution exceeds the applicable required contribution percentage of household income (under § 36B) or wages (under the § 4980H affordability safe harbors). As provided in §§ 1.5000A–3(e)(3)(ii)(A) and 1.36B–2(c)(3)(v)(A)(1), an employee’s required contribution is the portion of the annual premium that the employee must pay for self-only coverage (whether by salary reduction or otherwise).

If an employer offers to an employee an amount that cannot be used to pay for coverage under the employer’s health plan and is available only if the employee declines coverage (which includes waiving coverage in which the employee would otherwise be enrolled) under the employer’s health plan (an opt-out payment), this choice between cash and coverage presented by the offer of an opt-out payment is analogous to the cash-or-coverage choice presented by the option to pay for coverage via salary reduction. In both cases, the employee may purchase the health plan coverage only at the price of forgoing a specified amount of cash compensation that the employee would otherwise receive – salary, in the case of a salary reduction, or other compensation, in the case of the opt-out payment. For example, an employee who must reduce his or her compensation by $1,000 to pay for employer-provided health coverage has a choice that is similar to the choice of an employee who is ostensibly not required to pay anything for employer-provided coverage, but who would receive an additional $1,000 in compensation only if he or she declined coverage. In each case, the price of obtaining employer-provided health coverage is forgoing $1,000 in compensation that otherwise would be available to the employee.

An opt-out payment may have the effect of increasing an employee’s contribution for health coverage beyond the amount of any salary reduction contribution. For example, if an employer offers employees group health coverage through a § 125 cafeteria plan, requiring employees who elect self-only coverage to contribute $200 per month toward the cost of that coverage, and offers an additional $100 per month in taxable wages to each employee who declines the coverage, the offer of $100 in additional compensation has the economic effect of increasing the employee’s contribution for the coverage. In this case, the employee contribution for the group health plan effectively would be $300 ($200 + $100) per month, because an employee electing coverage under the health plan must forgo $100 per month in compensation in addition to the $200 per month in salary reduction.

Consistent with this analysis, Treasury and IRS have determined that it is generally appropriate to treat an unconditional opt-out arrangement (that is, an arrangement providing for a payment conditioned solely on an employee declining coverage under an employer’s health plan and not on an employee satisfying any other meaningful requirement related to the provision of health care to employees, such as a requirement to provide proof of coverage provided by a spouse’s employer) in the same manner as a salary reduction for purposes of determining an employee’s required contribution under §§ 36B and 5000A and any related consequences under § 4980H(b). Accordingly, Treasury and IRS intend to propose regulations reflecting this rule and requesting comments on the treatment of employer offers of opt-out payments under one or more of these sections. It is anticipated that the proposed regulations will also address and request comments on the treatment of opt-out payments that are conditioned not only on the employee declining employer-sponsored coverage but also on satisfaction of additional conditions (such as the employee providing proof of having coverage provided by a spouse’s employer or other coverage).

Treasury and IRS anticipate that the regulations generally will apply only for periods after the issuance of final regulations. However, Treasury and IRS also anticipate that mandatory inclusion in the employee’s required contribution of amounts offered or provided under an unconditional opt-out arrangement (as defined in the preceding paragraph) that is adopted after December 16, 2015 (a “non-relief-eligible opt-out arrangement”) will apply for periods after December 16, 2015. For this purpose, an opt-out arrangement will be treated as adopted after December 16, 2015 unless (1) the employer offered the opt-out arrangement (or a substantially similar opt-out arrangement) with respect to health coverage provided for a plan year including December 16, 2015; (2) a board, committee, or similar body or an authorized officer of the employer specifically adopted the opt-out arrangement before December 16, 2015; or (3) the employer had provided written communications to employees on or before December 16, 2015 indicating that the opt-out arrangement would be offered to employees at some time in the future.

For the period prior to the applicability date of regulations, employers are not required to increase the amount of an employee’s required contribution by the amount of an opt-out payment (other than a payment made under a non-relief-eligible opt-out arrangement) for purposes of § 6056 (Form 1095–C), and an opt-out payment (other than a payment made under a non-relief-eligible opt-out arrangement) will not be treated as increasing an employee’s required contribution for purposes of any potential consequences under § 4980H(b). However, until the applicability date of any further guidance (and in any event for plan years beginning before January 1, 2017), individual taxpayers may rely on the treatment of unconditional opt-out payments described in this Q&A–9 for purposes of §§ 36B and 5000A and treat these payments as increasing the employee’s required contribution. In addition, for this same period with respect to any individual who could demonstrate that the individual meets a condition (in addition to declining the employer’s health coverage) that must be satisfied to receive an opt-out payment (such as demonstrating that the employee has coverage under a spouse’s group health plan), the individual may treat the opt-out payment as increasing the employee’s required contribution for purposes of §§ 36B and 5000A.

Question 10: How are employer payments for fringe benefits made pursuant to the McNamara-O’Hara Service Contract Act (“SCA”),^[19] the Davis-Bacon Act,^[20] or the Davis-Bacon Related Acts (collectively with the Davis-Bacon Act, the “DBRA”)^[21] taken into account for purposes of determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan under §§ 36B and 5000A and any related consequences under § 4980H(b) (including application of the affordability safe harbors in § 54.4980H–5(e)(2))?

Answer 10: The SCA and DBRA require that workers employed on certain federal contracts be paid prevailing wages and fringe benefits. Under the SCA and DBRA, an employer generally can satisfy its fringe benefit obligations by providing a particular benefit or benefits, as determined by the employer, that have a sufficient dollar value. Alternatively, an employer generally may satisfy its fringe benefit obligations by providing the cash equivalent of benefits or some combination of cash and benefits, or it may permit employees to choose among various benefits or among various benefits and cash. If an employer chooses to provide fringe benefits under the SCA or DBRA by offering an employee the option to enroll in health coverage provided by the employer (including an option to decline that coverage), and the employee declines the coverage, that employer would then generally be required by the SCA or DBRA to provide the employee with cash or other benefits of an equivalent value.

Q&A–8 of this notice addresses employer flex contributions that are available to pay for health care and non-health care benefits (including cash or other taxable compensation) under a § 125 cafeteria plan and that, because they are non-health flex contributions, would not reduce the required employee contribution for purposes of §§ 36B and 5000A or for purposes of any related consequences under § 4980H(b). However, Treasury and IRS have been made aware that, as applied to employers with employees who are subject to the SCA or DBRA, the interaction of this treatment with SCA or DBRA fringe benefit requirements could create certain difficulties. In the case of an employer that chooses to provide fringe benefits under the SCA or DBRA by offering employees the option to enroll in health coverage provided by the employer (including an option to decline that coverage), the amount that must be provided to employees who decline to enroll in the group health plan as a cash payment or other benefits in lieu of coverage under the group health plan is substantial, would not count as an employer contribution toward the cost of coverage, and therefore would not reduce the employee’s required contribution for purposes of §§ 36B and 5000A or for purposes of any related consequences under § 4980H(b). Accordingly, an employer that chooses to satisfy its obligation to provide fringe benefits under the SCA or DBRA by offering an employee the option to enroll in health coverage provided by the employer (including an option to decline that coverage) generally would need to provide a significant additional subsidy to make the offer affordable for purposes of § 36B and avoid any related consequences under § 4980H(b). While the SCA and DBRA require employers to pay covered employees no less than prevailing wage and fringe benefit rates, this additional subsidy would result in certain employees receiving amounts significantly in excess of SCA and DBRA minimum rates.

Treasury and IRS continue to consider how the requirements of the SCA, the DBRA, and the employer shared responsibility provisions under § 4980H may be coordinated. However, until the applicability date of any further guidance, and in any event for plan years beginning before January 1, 2017, employer fringe benefit payments (including flex credits or flex contributions) under the SCA or DBRA that are available to employees covered by the SCA or DBRA to pay for coverage under an eligible employer-sponsored plan (even if alternatively available to the employee in other benefits or cash) will be treated as reducing the employee’s required contribution for participation in that eligible employer-sponsored plan for purposes of § 4980H(b), but only to the extent the amount of the payment does not exceed the amount required to satisfy the requirement to provide fringe benefit payments under the SCA or DBRA. In addition, for these same periods an employer may treat these employer fringe benefit payments as reducing the employee’s required contribution for purposes of reporting under § 6056 (Form 1095–C), subject to the same limitations that apply for purposes of § 4980H(b). Employers are, however, encouraged to treat these fringe benefit payments as not reducing the employee’s required contribution for purposes of reporting under § 6056. If an employee’s required contribution is reported without reduction for the amount of the fringe benefit payment and the employer is contacted by the IRS concerning a potential assessable payment under § 4980H(b) relating to the employee’s receipt of a premium tax credit, the employer will have an opportunity to respond and show that it is entitled to the relief described in this Q&A–10 to the extent that the employee would not have been eligible for the premium tax credit if the required employee contribution had been reduced by the amount of the fringe benefit payment or to the extent that the employer would have qualified for an affordability safe harbor under § 54.4980H–(4)(e)(2) if the required employee contribution had been reduced by the amount of the fringe benefit payment. See also Q&A–26 for certain relief with respect to employer information reporting under § 6056.

For purposes of §§ 36B and 5000A, individual taxpayers are not required to take these amounts into account as reducing the employee’s required contribution.

Treasury and IRS continue to consider other methods for reporting the amount of the required contribution for employees subject to the SCA or DBRA, including the possible use of indicator codes; however, no such other reporting methods, if ultimately adopted, will be required to be implemented for reporting on plan years beginning before January 1, 2017.

Question 11: Q&As 7 through 10 of this notice address the determination of an employee’s required contribution under §§ 36B and 5000A in cases in which an employer offers certain HRA contributions, flex credits, or opt-out payments. Some of these Q&As also provide transition relief for employers that treat these amounts differently for purposes of reporting the employee’s required contribution under § 6056. Could this different treatment have any implications for employees?

Answer 11: The vast majority of individuals offered employer-provided coverage will not be affected by the guidance provided in Q&As 7 through 10 of this notice. Specifically, the guidance, including the relief for employers, will not affect the following individuals’ eligibility for the premium tax credit: (1) employees who enrolled in the employer-sponsored coverage; (2) employees who enrolled in other health coverage that was not coverage offered through the Marketplace; (3) employees who were offered health coverage that does not include an arrangement described in Q&As 7 through 10; (4) employees who for any other reason would not qualify for a premium tax credit (for example, an employee who qualifies for Medicare or has household income in excess of the limits); (5) generally, employees who enrolled in coverage through the Marketplace and received the benefit of advance payments of the premium tax credit based on a determination by the Marketplace that their offer of employer-sponsored coverage was not affordable (see § 1.36B–2(c)(3)(v)(A)(3)); and (6) employees who did not enroll in any coverage.

Certain employees, however, may be affected by the transition relief for employers in Q&As 8 through 10. (Q&A–7 does not involve any relief for employers.) Because employers are permitted to report a lower amount as the employee’s required contribution by not taking into account the modifications described in Q&As 8 through 10 (including reporting an offer as a qualifying offer on Form 1095–C that, taking into account the modifications, would not be a qualifying offer), employees who enrolled in coverage through the Marketplace, who did not receive the benefit of advance payments of the premium tax credit, but whose household income is in the range for premium tax credit eligibility, may need additional information from their employers regarding their required employee contribution to determine whether they may claim the premium tax credit.

Employers using the § 6056 relief in Q&As 8 through 10 are encouraged to notify employees that they may obtain accurate information about their required contribution taking into account the modifications provided in Q&A–8 through 10 using the employer contact telephone number provided to the employee on Form 1095–C. Without regard to how the employee obtains that information, as determined under Q&A–8 through 10, if the modified required contribution is not affordable for purposes of § 36B and the employee is otherwise entitled to the premium tax credit, the employee may claim it on Form 8692, Premium Tax Credit, which is filed with the employee’s annual income tax return (regardless of the required contribution or qualifying offer information reported on that employee’s Form 1095–C).

Question 12: How are the adjustments to the affordability threshold under § 36B(c)(2)(C)(i)(II) that are made in accordance with § 36B(c)(2)(C)(iv) taken into account for purposes of the following provisions of the regulations under §§ 4980H and 6056: (1) the affordability safe harbors under § 54.4980H–5(e), (2) the reference to an offer of coverage under § 54.4980H–4, (3) the multiemployer plan interim relief described in section XV.E of the preamble to the final regulations under § 4980H, and (4) the definition of a qualifying offer for purposes of § 301.6056–1(j)(1) (reporting by applicable large employers)?

Answer 12: In each case, the reference to 9.5 percent is adjusted to reflect the adjustment to the affordability provisions under § 36B(c)(2)(C)(iv). Section 36B(b)(1) generally provides that an individual may be eligible for a premium assistance credit amount with respect to any coverage month. Section 36B(c)(2)(B) provides that a coverage month does not include any month with respect to an individual if for such month the individual is eligible for minimum essential coverage other than eligibility for coverage described in § 5000A(f)(1)(C) (relating to coverage in the individual market). Section 36B(c)(2)(C)(i) provides that an employee is not treated as eligible for minimum essential coverage if such coverage (1) consists of an eligible employer-sponsored plan (as defined in § 5000A(f)(2)), and (2) the employee’s required contribution (within the meaning of § 5000A(e)(1)(B)) with respect to the plan exceeds 9.5 percent (as adjusted annually) of the applicable taxpayer’s household income. Section 36B(c)(2)(C)(iv) provides that in the case of plan years beginning after 2014, the Secretary shall adjust the 9.5 percent under § 36B(c)(2)(C)(i)(II) in the same manner as the percentages are adjusted under § 36B(b)(3)(A)(ii). See Rev. Proc. 2014–37, 2014–33 IRB 363 (adjustment to 9.56 percent for plan years beginning in 2015); Rev. Proc. 2014–62, 2014–50 IRB 948 (adjustment to 9.66 percent for plan years beginning in 2016).

The affordability safe harbors in the regulations under § 4980H are based on 9.5 percent of an employee’s wages reported on the Form W–2, Wage and Tax Statement (§ 54.4980H–5(e)(2)(ii), Form W–2 safe harbor), 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 or lowest rate of pay during the calendar month (§ 54.4980H–5(e)(2)(iii), rate of pay safe harbor), or 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 (§ 54.4980H–5(e)(2)(iv), federal poverty line safe harbor). The 9.5 percent standard set forth in each of the affordability safe harbors is derived from § 36B(c)(2)(C)(i), basing affordability on a required contribution not exceeding 9.5 percent of the applicable taxpayer’s household income. The § 4980H(b) affordability safe harbors are intended to provide safe harbors with respect to the determination of the employee’s household income as part of the affordability calculation because an employer generally will not have access to that information with respect to its employees. The safe harbors are not intended to otherwise alter the affordability calculation, and accordingly Treasury and IRS intend to amend the regulations under § 4980H to reflect that the applicable percentage in the affordability safe harbors should be adjusted consistent with § 36B(b)(3)(A)(ii), so that employers may rely upon the 9.56 percent for plan years beginning in 2015 and 9.66 percent for plan years beginning in 2016.

Similarly, when determining if there is an offer of coverage for purposes of § 54.4980H–4 (requirement that employees be permitted to decline enrollment in coverage absent certain conditions in order for the arrangement to be treated as an offer of coverage), or whether coverage under a multiemployer plan is affordable under the Interim Guidance with respect to Multiemployer Arrangements in the preamble to the final regulations under § 4980H (79 FR 8576), an applicable large employer may use the 9.5 percent standard as indexed pursuant to § 36B(c)(2)(C)(iv).

Treasury and IRS also intend to amend the regulations under § 6056 that provide alternative reporting methods for certain types of offers of coverage, referred to as qualifying offers of coverage. Specifically, a qualifying offer under § 301.6056–1(j)(1)(i) is an offer at employee cost for employee-only coverage not exceeding 9.5 percent of the mainland single federal poverty line. Treasury and IRS intend to amend § 301.6056–1(j)(1)(i) to reflect that the reference to 9.5 percent is adjusted to reflect any adjustments under § 36B(c)(2)(C)(iv), and for those changes to be applicable back to December 16, 2015. For all periods, applicable large employers may rely on the 9.5 percent standard as adjusted pursuant to § 36B(c)(2)(C)(iv) in applying the alternative reporting method for qualifying offers.

Question 13: Under § 4980H(c)(5), in the case of any calendar year after 2014, the applicable dollar amounts of $2,000 and $3,000 under § 4980H(c)(1) and (b)(1) are increased based on the premium adjustment percentage as defined in § 1302(c)(4) of the Affordable Care Act (4.213431463 for 2015^[22] and 8.316047520 for 2016^[23]) rounded to the lowest multiple of $10. What are those amounts for calendar years 2015 and 2016?

Answer 13: For calendar year 2015, the adjusted $2,000 amount in § 4980H(c)(1) is $2,080 ($2,000 x .04213431463 = $84.27 plus $2,000 rounded down to $2,080), and the adjusted $3,000 amount in § 4980H(b)(1) is $3,120 ($3,000 x .04213431463 = $126.40 plus $3,000 rounded down to $3,120). For calendar year 2016, the adjusted $2,000 amount in § 4980H(c)(1) is $2,160 ($2,000 x .08316047520 = $166.32 plus $2,000 rounded down to $2,160), and the adjusted $3,000 amount in § 4980H(b)(1) is $3,240 ($3,000 x .08316047520 = $249.48 plus $3,000 rounded down to $3,240). Treasury and IRS anticipate that adjustments for future years will be posted on the IRS.gov website.

Question 14: To determine status as a full-time employee for purposes of § 4980H, § 54.4980H–1(a)(24) provides that 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 the 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)). To what extent are the rules under 29 CFR 2530.200b–2(a) incorporated into the definition of hour of service under § 4980H?

Answer 14: The definition of hour of service under § 54.4980H–1(a)(24), and specifically the reference to 29 CFR 2530.200b–2(a), was intended to provide parallels between the two regulatory provisions on the basic definition of an hour of service, without incorporating certain mechanical rules contained in the DOL regulations that do not fit into the general structure of § 4980H and specifically the identification of employees as full-time employees. This Q&A–14 clarifies how this reference to the DOL regulations applies. Treasury and IRS intend to include these clarifications as proposed regulations under § 4980H effective as of December 16, 2015.

The § 4980H regulations did not incorporate the provisions of 29 CFR 2530.200b–2(a)(2) that require hours of service to be credited for certain periods of time during which no duties are performed “irrespective of whether the employment relationship has terminated.” Because the purpose of the crediting of hours of service is to determine whether a current employee is a full-time employee (and to accumulate the hours of service of current non-full-time employees to calculate an employer’s number of full-time equivalent employees), an hour of service for purposes of § 4980H does not include any hours after the individual terminates employment with the employer.

The reference to 29 CFR 2530.200b–2(a) is intended to incorporate the limitations of 29 CFR 2530.200b–2(a)(2)(ii) and (iii) which are substantive exclusions of the type of payments the right to which will not result in an hour of service. Accordingly, an hour of service does not include (1) an hour for which an employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workmen’s compensation, or unemployment or disability insurance laws; and (2) an hour of service for a payment which solely reimburses an employee for medical or medically related expenses incurred by the employee.

However, the reference to 29 CFR 2530.200b–2(a) was not intended to incorporate the limitation on hours of service contained in 29 CFR 2530.200b–2(a)(2)(i), which is not a substantive part of the definition of an hour of service but instead a mechanical limitation on the crediting of those hours appropriate in the contexts to which the DOL regulations apply but not with respect to § 4980H and the definition of a full-time employee and a full-time equivalent employee. Accordingly, there is no 501-hour limit on the hours of service required to be credited to an employee on account of any single continuous period during which the employee performs no duties if the hours of service would otherwise qualify as hours of service.^[24]

Finally, the § 4980H regulations defining an “hour of service” are intended to incorporate the remaining provisions of 29 CFR 2530.200b–2 relating to the source of the payment for the hour of service for which no duties were performed. For purposes of determining whether an hour of service must be credited, a payment is deemed to be made by or due from an employer regardless of whether the payment is made by or due from the employer directly, or indirectly through, among others, a trust fund or insurer to which the employer contributes or pays premiums, and regardless of whether contributions made or due to the trust fund, insurer, or other entity are for the benefit of particular employees or are on behalf of a group of employee in the aggregate.

Accordingly, periods during which an individual is not performing services but is receiving payments due to short-term disability or long-term disability result in hours of service for any part of the period during which the recipient retains status as an employee of the employer, unless the payments are made from an arrangement to which the employer did not contribute directly or indirectly. For this purpose, a disability arrangement for which the employee paid with after-tax contributions (so that the benefits received under the arrangement are excluded from income under § 104(a)(3)) would be treated as an arrangement to which the employer did not contribute, and payments from the arrangement would not give rise to hours of service. Periods during which the employee is not performing services but is receiving payments in the form of workers compensation wage replacement benefits under a program provided by the state or local government do not result in hours of service.

Question 15: Is an employee who primarily performs services for one or more educational organizations but is not the employee of the educational organization(s) (because, for example, the individual is an employee of a staffing agency) subject to the special rehire rules under §§ 54.4980H–3(c)(4)(ii) and 54.4980H–3(d)(6) (and the related definition of “employment break period” at § 54.4980H–1(a)(17)) and thus only treated as a new employee after a break of at least 26 consecutive weeks and, if the employer is using the lookback measurement method, subject to the special hours of service averaging rules?

Answer 15: Treasury and IRS intend to amend the regulations under § 4980H to address the application of the special rehire rules under §§ 54.4980H–3(c)(4)(ii) and 54.4980H–3(d)(6)(ii) to employees who primarily perform services for one or more educational organizations.

Because Treasury and IRS have concluded that it would not be appropriate for employees who had become eligible for coverage prior to a break in service to be subjected to a new period of exclusion from a plan (which applies in certain circumstances for new employees) based upon a brief break in service, Treasury and IRS adopted rehire rules under which an employee may be treated as a new employee only after a break in service of at least 13 weeks. Treasury and IRS concluded, however, that without special rehire rules, this general rehire rule may be inequitable to employees of educational organizations who had become eligible for coverage prior to the break. Similarly, Treasury and IRS concluded that without special rules under the lookback measurement method for employees of educational organizations, application of those rules could be inequitable to those employees if, for purposes of determining the average weekly hours of service over the entire lookback period, employers counted the summer recess periods (or other periods) during which some of these employees may not provide services as periods during which no hours of service were performed. To provide more appropriate rules for employees of educational organizations, the final regulations under § 4980H provide two special rules.

Sections 54.4980H–3(c)(4)(ii) and 54.4980H–3(d)(6)(ii)(A) address the treatment of a new employee after a period of absence for employees of educational organizations for purposes of determining the status of these employees as full-time employees, under both the monthly measurement method and the lookback measurement method. These sections provide that for an employer that is an educational organization, an employee who resumes providing service 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. Section 54.4980H–3(d)(6)(ii)(B) applies to educational organizations applying the lookback measurement method of determining full-time employee status and provides special rules to account for the periods during which the employee may not be providing services, such as a summer break period.

Treasury and IRS have been made aware that some educational organizations are attempting to avoid application of these rules by, for example, using a third-party staffing agency for certain individuals providing services. Because the staffing agency is not an educational organization subject to the special rule, the staffing agency could apply the lookback measurement method or the rules on new hires to treat some or all of these individuals as failing to be full-time employees or as new employees after a break in service of less than 26 weeks. In some cases, the facts and circumstances may demonstrate that the staffing agency is not the common law employer of the individual for purposes of § 4980H, but rather that the individual remains the employee of the educational organization and the special lookback measurement rule and rehire rule would continue to apply. But even if the individuals are the employees of the staffing agency or other third party, this structure would circumvent the intent of the special rules. Accordingly, Treasury and IRS intend to propose amendments to the regulations under § 4980H to provide for application of the special rule in certain circumstances in which the services are being provided to one or more educational organizations, even if the employer is not an educational organization. The amendments will apply as of the applicability date specified in the regulations, but in no event will the applicability date be earlier than the first plan year beginning after the date on which the proposed regulations are issued.

Specifically, Treasury and IRS anticipate amending the regulations under § 4980H to provide that the special rules under §§ 54.4980H–3(c)(4)(ii) and 54.4980H–3(d)(6)(ii) (and the related definition of “employment break period” at § 54.4980H–1(a)(17)) apply not only to employees of educational organizations, but also to any employee providing services primarily to one or more educational organizations for whom a meaningful opportunity to provide services during the entire year (to an educational organization or any other type of service recipient) is not made available. For example, the special rule would apply to an employer with respect to a bus driver who is primarily placed to provide bus driving services, or a cafeteria worker who is primarily placed to provide services in a cafeteria, at one or more educational organizations and who is not provided a meaningful opportunity to provide services during one or more months of the calendar year (for example, the summer recess period). In contrast, an employer that primarily places bus drivers or cafeteria workers at educational organizations would not apply the special rule to an employee if the individual was offered a meaningful opportunity to provide services during all months of the year (for example, in the case of a cafeteria worker, by working at a hospital cafeteria during the summer recess period of the educational organization at which the individual generally is placed).

Question 16: Is an AmeriCorps member providing services to a grantee receiving assistance under the national service laws an employee (of either AmeriCorps or the grantee) for purposes of the employer shared responsibility provisions of § 4980H?

Answer 16: No. The National and Community Service Act provides that participants in AmeriCorps programs are not considered to be employees of the grantee receiving assistance under the national service laws through which the participant is engaging in service (42 U.S.C. § 12511(30)(B)). Similarly, AmeriCorps members generally are not considered Federal employees and are not subject to the provisions of law relating to Federal employment. (See, e.g., 42 U.S.C. § 12620). Consistent with these provisions, for purposes of § 4980H, participants in the AmeriCorps programs are not employees of the grantee receiving assistance through AmeriCorps for which the participant is providing services.

Question 17: How is an offer of coverage under TRICARE due to employment which results in eligibility for coverage under TRICARE treated for purposes of §§ 4980H and 6056?

Answer 17: For purposes of determining any potential liability under § 4980H and for purposes of the related information reporting requirements under § 6056, an offer of coverage under TRICARE for any month due to employment with an employer that results in eligibility for TRICARE is treated as an offer by that employer of minimum essential coverage under an eligible employer-sponsored plan for that month.

Question 18: For purposes of determining whether an employer had 50 or more full-time employees (including full-time equivalents) in the previous year and therefore is an applicable large employer (or ALE member), § 4980H(c)(2)(C)(i) and § 54.4980H–1(a)(16) require that employers apply the aggregation rules under § 414(b), (c), (m), and (o) and treat all the aggregated employers as a single employer. How do these aggregation rules apply to employers that are government entities?

Answer 18: The aggregation rules under § 414(b), (c), (m), and (o) provide that (1) corporations that are part of a controlled group of corporations, (2) groups of other types of entities that are under common control, and (3) members of an affiliated service group, may in each case be treated as a single employer for certain employee benefit requirements. Section 4980H(c)(2)(C)(i) and § 54.4980H–1(a)(16) apply these standards in determining whether an employer is an applicable large employer (or ALE member). The regulations under § 414(b), (c), (m), and (o) do not specifically address the application of these standards to government entities. Accordingly, as provided in section V.D of the preamble to the final regulations under § 4980H, government entities may apply a reasonable, good faith interpretation of the employer aggregation rules under § 414(b), (c), (m), and (o) for purposes of determining whether a government entity is an applicable large employer or an ALE member, and thereby subject to the employer shared responsibility provisions under § 4980H and the related reporting requirements under § 6056.

If two government entities would independently be applicable large employers (because each of the entities, in the previous year, had 50 or more full-time employees, including full-time equivalents), the aggregation analysis will be of limited consequence. That is because each of those two entities would be subject to § 4980H and the related reporting requirements under § 6056 regardless of the aggregation analysis and any consequences of application of the employer aggregation rules would be limited (generally relevant only to the allocation of the reduction by 30 full-time employees for the calculation of any assessable payment under § 4980H(a) or the cap on any assessable payment under § 4980H(b)).

Question 19: Is a separate employer identification number (EIN) required for each government entity employer that is subject to a reporting requirement (as an applicable large employer or ALE member, or if neither, because it has employees receiving self-insured health coverage)?

Answer 19: Yes, each separate employer entity (not applying any aggregation rules) that is an applicable large employer (or ALE member), or that provides self-insured health coverage to its employees, must use its own EIN for purposes of the applicable reporting requirements. Accordingly, separate Forms 1094–C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, must be filed by each employer that is an ALE member of an applicable large employer group, and each Form 1094–C must have a separate EIN that is the EIN of the ALE member filing the form. For example, assume that a state treats the state executive and executive agencies, the state judiciary, and the state legislature as three separate employers that are ALE members of the applicable large employer group that reflects the state government. Each of the three employers is required to have a separate EIN and to file the Forms 1094–C and 1095–C reflecting the EIN of the employer.

The analysis is not changed by a government entity’s use of a designated government entity (DGE). In that case, the government entity has transferred the responsibility for reporting to the DGE, but the DGE is still reporting on behalf of the government entity that retains its separate status as an applicable large employer (or ALE member) subject to the employer shared responsibility provisions. For example, if ten counties that are applicable large employers enter into agreements with a state government entity that the state will be the DGE for each of the counties, the state government entity should file a Form 1094–C on behalf of each of the counties (as well as a Form 1094–C on behalf of itself as an employer of its own employees). Each Form 1094–C would list the name and EIN of the state government entity as the DGE, and the name and EIN of the county as the employer. The Form 1094–C for each county would be accompanied by the Forms 1095–C for each employee of that county and would identify the county as the employer.

Question 20: Notice 2004–50, 2004–2 C.B. 196, Q&A–5 provides guidance on the eligibility to contribute to an HSA of an individual who is eligible to receive medical benefits administered by the Department of Veterans Affairs (VA), stating that the individual is not eligible to make HSA contributions for any month if the individual has received medical benefits from the VA at any time during the previous three months. Notice 2008–59, 2008–29 IRB 123, Q&A–9 clarified that although an individual actually receiving medical benefits from the VA at any time in the previous three months generally is not eligible to contribute to an HSA, the disqualification rule does not apply if the medical benefits consist solely of disregarded coverage or preventive care. Section 4007(b) of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (the Surface Transportation Act) amends § 223 to provide that an individual shall not fail to be treated as an eligible individual for any period merely because the individual receives hospital care or medical services under any law administered by the Secretary of Veterans Affairs for a service-connected disability (within the meaning of § 101(16) of title 38, United States Code).

How does § 4007(b) of the Surface Transportation Act affect the prior guidance on the interaction of the receipt of VA health care and eligibility to contribute to an HSA?

Answer 20: As modified by the legislation, an individual actually receiving medical benefits from the VA is not disallowed from making HSA contributions if the medical benefits consist solely of (1) disregarded coverage, (2) preventive care, or (3) hospital care or medical services under any law administered by the Secretary of Veterans Affairs for service-connected disability (within the meaning of § 101(16) of title 38, United States Code). Distinguishing between services provided by the VA for service-connected disabilities and other types of medical care is administratively complex and burdensome for employers and HSA trustees or custodians. Moreover, as a practical matter, most care provided for veterans who have a disability rating will be such qualifying care. Consequently, as a rule of administrative simplification, for purposes of this rule, any hospital care or medical services received from the VA by a veteran who has a disability rating from the VA may be considered to be hospital care or medical services under a law administered by the Secretary of Veterans Affairs for service-connected disability.

Question 21: Notice 2013–71 modifies the rules for cafeteria plans to allow a carryover of up to $500 of unused amounts remaining at the end of the plan year in a health FSA. Section 54.4980B–2, Q&A–8(e) provides that a health FSA is not obligated to make COBRA continuation coverage available for the plan year in which a qualifying event occurs unless as of the date of the qualifying event, the amount the qualified beneficiary may become entitled to receive during the remainder of the plan year as a benefit exceeds the amount the health FSA may require to be paid for COBRA continuation coverage for the remainder of the plan year.

In determining the amount of the benefit that a qualified beneficiary is entitled to receive during a plan year, is any amount that has been carried over from a prior plan year as permitted by Notice 2013–71 included?

Answer 21: Yes. Any carryover amount is included in determining the amount of the benefit that a qualified beneficiary is entitled to receive during the remainder of the plan year in which a qualifying event occurs. The following example illustrates the application of this rule:

Question 22: Section 4980B(f)(2)(C) provides that the maximum amount that a group health plan is permitted to charge for COBRA continuation coverage is 102 percent of the applicable premium for the period of COBRA continuation coverage. Section 4980B(f)(4) generally defines “applicable premium” as the cost to the plan of providing coverage during such period for similarly situated beneficiaries who have not incurred a COBRA qualifying event (nonCOBRA beneficiaries). Under § 4980B(f)(4)(B), a self-insured plan may base the applicable premium on a reasonable estimate of the cost of providing coverage for nonCOBRA beneficiaries, provided that the reasonable estimate is determined on an actuarial basis and satisfies any other applicable requirements under the regulations. An example under Q&A–8(f) of § 54.49890B–2 illustrates that with respect to a health FSA, an employer may base its reasonable estimate of the cost of providing coverage for similarly situated nonCOBRA beneficiaries on the maximum amount available under the health FSA for the period, taking into account both the employee salary reduction and any additional employer contribution.

What is the maximum amount that a health FSA is permitted to require to be paid for COBRA continuation coverage if the maximum benefit that an employee is entitled to receive under the health FSA for the entire year includes carryover amounts?

Answer 22: The maximum amount that a health FSA is permitted to require to be paid for COBRA continuation coverage (that is, 102 percent of the applicable premium) does not include unused amounts carried over from prior years. The applicable premium is based solely on the sum of the employee’s salary reduction election for the year and any nonelective employer contribution. The following example illustrates the application of this rule:

Question 23: Is a health FSA that allows carryovers of unused amounts for similarly situated nonCOBRA beneficiaries obligated to allow a carryover of unused amounts to a qualified beneficiary who elected COBRA continuation coverage with respect to the health FSA, even if the result is that the COBRA continuation coverage under the health FSA continues beyond the plan year?

Answer 23: If a health FSA allows carryovers of unused amounts for similarly situated nonCOBRA beneficiaries, notwithstanding § 54.4980B–2, Q&A–8(d), the health FSA must allow carryovers by similarly situated COBRA beneficiaries, subject to the same terms applicable with respect to nonCOBRA beneficiaries. However, the health FSA is not required to allow a COBRA beneficiary to elect additional salary reduction amounts for the carryover period, or to have access to any employer contributions to the health FSA made during the carryover period. In addition, the carryover is limited to the applicable COBRA continuation period.

As noted in Q&A–22 of this notice, the maximum amount that a health FSA can require to be paid as the applicable premium does not include unused amounts carried over from prior years. Thus, if a qualified beneficiary is allowed a carryover of unused amounts to a later year, the applicable premium for that later year period is zero. The following example illustrates the application of this rule.

Question 24: May a health FSA condition the ability to carry over unused amounts on participation in the health FSA in the next year?

Answer 24: Yes. A health FSA may limit the availability of the carryover of unused amounts (subject to the $500 limit) to individuals who have elected to participate in the health FSA in the next year, even if the ability to participate in that next year requires a minimum salary reduction election to the health FSA for that next year.

Question 25: May a health FSA limit the ability to carry over unused amounts to a maximum period?

Answer 25: Yes. A health FSA may limit the ability to carry over unused amounts to a maximum period (subject to the $500 limit). For example, a health FSA can limit the ability to carry over unused amounts to one year. Thus, if an individual carried over $30 and did not elect any additional amounts for the next year, the health FSA may require forfeiture of any amount remaining at the end of that next year.

Question 26: For employer reporting required under § 6056 (Forms 1094–C and 1095–C), is relief available from penalties for incomplete or incorrect returns filed or statements furnished to employees in 2016 for coverage offered (or not offered) in calendar year 2015?

Answer 26: Yes. To assist with the implementation of the information reporting requirements, Treasury and IRS have provided certain relief applicable for reporting in early 2016 related to the coverage offered (or not offered) in calendar year 2015. See preamble to the final regulations under § 6056, section XIII, 79 FR 13231, 13246 (Mar. 10, 2014). This relief is intended to provide additional time to develop appropriate procedures for collection of data and compliance with the new reporting requirements. Accordingly, the IRS will not impose penalties under §§ 6721 and 6722 on ALE members that can show that they have made good faith efforts to comply with the information reporting requirements. Specifically, relief is provided from penalties under §§ 6721 and 6722 for returns and statements filed and furnished in 2016 to report offers of coverage in 2015 for incorrect or incomplete information reported on the return or statement. This relief does not apply in the case of ALE members that cannot show a good faith effort to comply with the information reporting requirements or that fail to timely file an information return or furnish a statement. However, consistent with existing information reporting rules, ALE members that fail to timely meet the requirements still may be eligible for penalty relief if the IRS determines that the standards for reasonable cause under § 6724 are satisfied. Similar relief has also been provided with respect to reporting on coverage under § 6055. See preamble to the regulations under § 6055, section 7, 79 FR 13220, 13226 (Mar. 10, 2014).

Q&A–9, Q&A–12, Q&A–14, and Q&A–15 of this notice provide certain guidance that Treasury and IRS intend to incorporate into proposed regulations. These proposed regulations will provide stakeholders an opportunity for comment on the issues addressed in the proposed regulations. However, to assist in development of those proposed regulations, Treasury and IRS request comments on the guidance provided in those Q&As.

Public comments should be submitted no later than February 28, 2016. Comments should include a reference to Notice 2015–87. Send submissions to CC:PA:LPD:PR (Notice 2015–87), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2015–87), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, or sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include “Notice 2015–87” in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.

Except as otherwise explicitly provided in this notice, the guidance provided in this notice applies for plan years beginning on and after December 16, 2015, but taxpayers may apply the guidance provided in this notice for all prior periods.

The principal author of this notice is Shad Fagerland of the Office of Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this notice contact at (202) 317-5500 (not a toll-free number).

This announcement serves notice to donors that on August 27, 2015, the United States Tax Court entered an order dismissing the case involving the below-referenced organization. The organization listed below is not recognized as an organization described in section 501(c)(3), is not exempt from tax under section 501(a), and is not an organization described in section 170(c)(2).

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