Affordable Care Act Treatment of Fringe Benefits Provided Under Federal Contracts

Last month the IRS issued Notice 2015-87, providing further guidance for applicable large employers on the employer shared responsibility provisions of Code § 4980H. For federal contractors required to provide a certain amount of health and welfare fringe benefits to employees, the Notice brought some welcome relief, at least for the time being.   Employers with benefit obligations governed by the McNamara-O’Hara Service Contract Act (“SCA”) or the Davis-Bacon Act and related acts (“DBRA”) typically meet those obligations by providing employees working under government contracts with benefits, cash in lieu of benefits, or a combination of both. Federal contractors with fifty or more employees (full-time or full-time equivalents) in a calendar year are considered applicable large employers who are thus subject to the ACA’s employer shared responsibility provisions and employer informational reporting requirements concerning offers of minimum essential coverage. 

Notice 2015-87 addresses how fringe benefits mandated under the SCA or DBRA may be treated for purposes of determining whether an applicable large employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan. The Notice provides that for plan years beginning before January 1, 2017, such fringe benefits — including flex credits, flex contributions, or cash payments made in lieu of benefits — will be treated as reducing the employee’s required contribution for participation in the plan for purposes of the Code § 4980H(b) penalty to the extent the payment amount does not exceed the fringe benefit amount required under the applicable federal contract. Furthermore, these same amounts may be treated by the employer as reducing the employee’s required contribution for purposes of employer reporting obligations under Code § 6056 (Form 1095-C), to the same extent that the payment amount does not exceed the fringe benefit amount required under the applicable federal contract. However, individual taxpayers are not required to consider these amounts in reducing the employee’s required contribution for purposes of Code §§ 36B — concerning premium tax credit eligibility — and 5000A — concerning the individual mandate affordability exemption.

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This is a reprint of an Article by: Amy M. Thompson, Jackson Lewis P.C. Benefits Law Advisor Blog

James Jordan