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.

To illustrate, the Notice provided the following example: Facts: Employer offers employees subject to the SCA or DBRA coverage under a group health plan through a § 125 cafeteria plan, which the employees may choose to accept or reject. Under the terms of the offer, an employee may elect to receive self-only coverage under the plan at no cost, or may alternatively decline coverage under the health plan and receive a taxable payment of $700 per month. For the employee, $700 per month does not exceed the amount required to satisfy the fringe benefit requirements under the SCA or DBRA. Conclusion: Until the applicability date of any further guidance (and in any event for plan years beginning before January 1, 2017), for purposes of §§ 4980H(b) and 6056, the required employee contribution for the group health plan for an employee who is subject to the SCA or DBRA is $0. However, for purposes of §§ 36B and 5000A, that employee’s required contribution for the group health plan is $700 per month. Employers subject to the SCA or DBRA must keep in mind that while monetary contributions to fringe benefits are taken into account for purposes of the “affordability” requirement under the ACA, applicable large employers must continue to meet the ACA’s mandate to offer minimum essential coverage that is affordable and provides minimum value to full-time employees in order to avoid ACA penalties.