Impact of the Supreme Court’s Decision on the PP&ACA on Government Contractors (Winter/Spring 2013 GovCon eNews)
The Supreme Court’s decision in June 2012 upholding the individual mandate component in the Patient Protection and Affordable Care Act (ACA), P.L. 111-148, as a tax can have an impact on potential allowable costs incurred by Government contractors. Somewhat overlooked in the debate about the ACA is the charge that is levied upon certain businesses if they do not offer qualifying health insurance to their employees. This article will address the question as to whether this charge is a tax or a penalty. This has been clarified, but not definitively answered, by the Court’s decision In addition, we will also address the question as to whether this coverage is a required fringe benefit that would not be considered a bona fide fringe benefit under the Service Contract Act (SCA).
The ACA added a new provision to the Internal Revenue Code (IRC), 26 U.S.C. §4980H, which states that if any applicable large employer fails to offer its full time employees and their dependents the opportunity to enroll in an employer sponsored health care plan providing minimum essential coverage, as defined in IRC §5000A(f)(2), that employer will be subject to “an assessable payment” calculated as specified in §4980H. The Act does not specifically mandate that employers provide coverage to employees, but only imposes a charge on those who do not. Thus, it is possible that some employers may determine that it is cheaper to pay the charge than to provide the coverage levels mandated by ACA.
For these purposes, a large employer is one who employed an average of at least 50 full-time employees on business days during the preceding calendar year. However, an employer will not be considered large if its workforce exceeds 50 full-time employees for up to 120 days during the calendar year and the employees in excess of 50 were workers who perform labor or services on a seasonal basis as defined by the Department of Labor. Consequently, many employers that are considered small businesses under SBA standards will be considered large businesses under ACA.
The Act goes on to say that the affiliation rules contained in §414 of the IRC will be applied in determining an employer’s size. In this regard, all companies that are affiliated under the IRS rules will be treated as one employer.
Turning to the question of how to compute the number of full-time employees, §4980H defines a “full-time employee” as an employee who works at least an average of 30 hours per week during any given month. In addition, full-time equivalent (FTE) positions are to be considered when calculating the number of full-time employees. The calculation of the number of FTE positions is done by dividing the aggregate number of hours worked by part-time employees for a month by 120. Thus, if part-time employees worked a total of 360 hours in a month, this would result in the employer being credited with 3 FTE positions which would be added to the number of full-time employees to determine the employer’s size. It should be noted that temporary employees, other than seasonal employees, are not excluded from this calculation. Finally, although part-time workers are considered when determining an employer’s size, the Act does not require employers to provide health insurance to part-time workers.
Tax vs. Penalty
As for the nature of the “assessable payment,” that term is used several times throughout §4980H. In addition, on two occasions §4980H refers to it as a “tax.” Finally, §4980H(d) states that the “assessable payment provided by [§4980H] shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68 [of the IRC].” In all substantive aspects, this language is identical to the enforcement procedures at issue before the Supreme Court. Significantly, the Court held that penalties under chapter 68B of the IRC are treated as taxes.
Although the exact nature of §4980H has not been determined by the courts, its similarity to §5000A and the Court’s interpretation of that latter statute is strong evidence that the “assessable payment” called for by §4980H is a tax. This is bolstered by the fact that Congress specifically called the payment a tax in two paragraphs of §4980H. Thus, we believe that the “assessable payment” is a tax.
The characterization of §4980H as a tax and not as a penalty has contractual significance for government contractors. Pursuant to FAR 31.205-41, taxes that are required to be paid by a contractor, and are paid or accrued, are generally allowable costs. However, the cost principle lists seven exceptions to this general rule of allowability, none of which apply to the tax imposed by §4980H. Accordingly, if a contractor pays the “assessable payment” called for by §4980H, and it is determined that the payment is a tax, that payment would be an allowable cost on government contracts under the taxes cost principle as it now stands. On the other hand, if the payment is determined to be a penalty, the payment would not be allowable under FAR 31.205-15, fines, penalties and mischarging costs.
Impact of ACA Insurance Requirements and the SCA
This brings us to the SCA which requires service contractors to provide their employees with not less than the fringe benefits, including “medical or hospital care”, that the Secretary of Labor finds to be prevailing in the local area. This obligation is not dependent on the size of the contractor. Thus, SCA contractors may be “small” under the ACA criteria, but still subject to the fringe benefit requirements of the SCA. This means that the level of fringe benefits provided by these “small” concerns may be considered in determining the prevailing level of fringe benefits in a locality. Consequently, if these concerns provide a lower level of health coverage than is required under the ACA, that will be considered in determining the minimum amount of coverage all service contractors must provide as well as the coverage that must be provided by ACA large businesses. Thus, theoretically, the prevailing fringe benefit rate can be higher than the levels provided by “small” businesses, but lower than the levels provided by ACA large businesses. There are three SCA consequences to this. First, those contractors who are small by ACA standards will have to increase the fringe benefits they provide to their employees. This can be particularly burdensome because under the SCA part-time and temporary workers are required to be paid the prevailing fringe benefits while employers are not generally required to provide such employees with ACA coverage.
The second consequence is that ACA large businesses may be providing their employees with health coverage that exceeds that prevailing in the local area. This raises the question as to whether the excess can be applied in meeting the employer’s other fringe benefit obligations under the SCA.
DoL’s rules implementing the SCA permit contractors to substitute a bona fide fringe benefit for a fringe benefit listed in a wage determination. However, benefits required by any Federal law, other than the SCA, are not considered bona fide fringe benefits. Therefore, if the ACA minimum coverage is “required” by ACA, any excess above the SCA wage determination amount could not be used to offset the employer’s obligations for other fringe benefits. On the other hand, if the coverage described in the ACA is not required, the excess could be used as an offset. In this regard, it must be remembered that the ACA does not say that an employer must provide the minimum essential coverage, but imposes a tax if an employer does not. This issue will have to be resolved either through regulations issued by DoL or through litigation.
Third, is whether the assessment that large businesses pay under ACA will be considered in determining the prevailing level of fringe benefits in an area. This becomes an issue as these assessments are intended to help pay for the government subsidized insurance exchanges that states are to establish under ACA to afford uninsured Americans an opportunity to obtain affordable health insurance.