February 25, 2022
While the Affordable Care Act (ACA) is over ten years old, many questions still linger in the weeds for employers navigating the complex regulatory environment. One area where there is still a lot of uncertainly involves mergers and acquisitions. The IRS requested comments on myriad merger issues related to the ACA back in 2014 when it released Notice 2014-49. However, further guidance has not been issued which has resulted in uncertainty. One question that remains unanswered is what happens when a non-applicable large employer (non-ALE) acquires 100 percent of the stock in an applicable large employer (ALE) in the middle of the year. The remainder of this article explores this question.
Before diving into the details of the question a brief review of how an employer determines if it is an ALE for a year is necessary. An employer’s ALE status is determined on the previous year’s hours of service. The final regulations go into great detail about how an employer determines its ALE status. A simpler approach for employers involves two simple rules:
- add the hours of service accumulated by an employer’s workforce for the calendar month; and
- never include more than 120 hours of service in any calendar month for an employee.
Apply the two rules and divide the number by 120 to get an employer’s ALE number for a calendar month. After an employer does this for all 12 calendar months in a calendar year, add the total and divide by 12. If an employer’s number is 50 or more, it is an ALE unless the seasonal worker exception applies. For more details on how to determine if an employer is an ALE please review our previous publication which discusses the topic in great detail.
The scenario we would like to review in this paper is what are the consequences of a non-ALE acquiring an ALE in the middle of the year. Suppose, Small Inc., an entity which is not an ALE, acquires 100 percent of the stock of Large Inc., an ALE, on March 15, 2021. The question is how does the merger impact the ALE status of the two entities. Suppose, for the purpose of this example, that Small Inc. does not offer any of its employees health coverage. However, Large Inc. offers its full-time employees minimum value coverage at an affordable price.
The text of the ACA is clear that employers who are part of the same controlled group will be treated as one employer when determining ALE status (see IRC section 4980H(c)(2)(C)(i)). While it is clear that a controlled group is treated as one employer for determining ALE status, the details of how a merger operates with ALE status mid-year is far from clear. The IRS recognized all of the unanswered questions surrounding mergers and acquisitions related to the ACA so it released Notice 2014-49 which overviewed some of the issues and solicited comments. Unfortunately, the IRS has not issued additional guidance since the Notice.
First, it is easy to analyze Large Inc. as it was an ALE prior to the merger and will continue to be an ALE after the merger. As a result, Large Inc. will continue to be subject to the penalties under section 4980H and have to report the Forms 1094-C and 1095-C to the IRS.
The analysis with respect to Small Inc. is far from clear. Small Inc. was not an ALE prior to the merger. However, after the merger both entities, Small Inc. and Large Inc., are clearly part of a controlled group. The question is whether becoming part of that controlled group mid-year made Small Inc. an ALE on the date of closing or some other time in 2021. The question is of critical importance as Small Inc. will have reporting obligations (the Forms 1094-C and 1095-C) if it is an ALE and it could be subject to penalties under IRC section 4980H.
The preamble to the final regulations for Shared Responsibility for Employers Regarding Health Coverage states “The Treasury Department and the IRS continue to consider development of rules for identifying a predecessor employer (or the corresponding successor employer), and until further guidance is issued, taxpayers may rely upon a reasonable, good faith interpretation of the statutory provision on predecessor (and successor) employers for purposes of the applicable large employer determination. For this purpose, use of the rules developed in the employment tax context for determining when wages paid by a predecessor employer may be considered as having been paid by the successor employer (see § 31.3121(a)(1)– 1(b)) is deemed reasonable.” However, section 31.3121(a)(1)– 1(b) is not relevant in the context we are exploring for ALE as ALE status was a concept created by the ACA. Therefore, employers are left to work with the “reasonable, good faith interpretation” language.
The conservative, prevalent commentary online suggests that Small Inc. would become ALE members on the day of closing. However, that may only be the prevalent opinion online as it is the way to have clients avoid having potential legal issues. Other provisions of the final regulations related to 4980H could be used to make an argument that Small Inc. would not become an ALE until January 1, 2022.
First, an employer determines its ALE status based on the prior year’s hours of service. Therefore, there are no situations where an employer would hire enough employees mid-year to make the employer an ALE in the middle of the year. For example, suppose an employer was not an ALE in 2021 based on the employer’s workforce’s hours of service in 2020. In May 2021, due to rapid growth, the employer decides to hire 500 employees. While the employer will most likely be an ALE in 2022 because of the extensive hiring in May 2021, the employer’s ALE status will not change in 2021. Unless the IRS intends mergers and acquisitions to be treated differently, there can never be an event that happens that causes an employer to become an ALE mid-year. It would be odd if the IRS intended mergers and acquisitions to be treated differently and then elected to not explicitly state the details in the regulations or subsequent Notices to Notice 2014-49.
Furthermore, the final regulations include an exception for an employer’s first year of becoming an ALE. The exception was presumably added for employers who become ALEs during the last month of the preceding year to give them time to comply. The final regulations state “With respect to an employee who was not offered coverage by the employer at any point during the prior calendar year, if the applicable large employer offers coverage to the employee on or before April 1 of the first calendar year for which the employer is an applicable large employer, the employer will not be subject to an assessable payment under section 4980H by reason of its failure to offer coverage to the employee for January through March of that year, provided that this relief applies only with respect to potential liability under section 4980H(b) (for January through March of the first calendar year for which the employer is an applicable large employer) if the coverage offered by April 1 provides minimum value. If the employer does not offer coverage to the employee by April 1, the employer may be subject to a section 4980H(a) assessable payment with respect to January through March of the first calendar year for which the employer is an applicable large employer in addition to any later calendar months for which coverage was not offered.” While this exception only provides a three-month grace period and only does so if coverage is offered by April 1 of the first year of becoming an ALE, this provision supports a grace period.
One problematic area for Large Inc. is what to do regarding line 21 and part IV of the Form 1094-C. The instructions make it clear that an entity should check the “Yes” box on line 21 if the ALE Member is part of an Aggregated ALE Group. It is clear that Large Inc. is part of an Aggregated ALE Group with Small Inc. beginning in March 2021. If Large Inc. checks the “Yes” box, it would need to list Small Inc. in part IV of the Form 1094-C. While this is not problematic, it would be problematic if Small Inc. did not file Forms 1094-C and 1095-C with the IRS. It is our experience that ALEs who do not file a Form 1094-C and accompanying Forms 1095-C with the IRS will get a letter from the IRS inquiring about why the entity has not filed the Forms 1094-C and 1095-C.
An employer entertaining a merger must explore these ACA matters prior to entering into any agreement. While we strongly believe there is a creditable argument that no employer can become an ALE mid-year, the IRS does not have any sort of guidance explicitly addressing that scenario. We would encourage the IRS to finally release rules regarding mergers and acquisitions. If you have any questions or you would like assistance with reporting the Forms 1094-C and 1095-C to the IRS, please contact us.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorneys P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.
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