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On Wednesday, December 16, 2015, the IRS released Notice 2015-87 that provided some new information and clarifications about how the ACA’s market reforms affect group health plans. A few key items discussed are the affordability safe harbors, penalties and how to determine hours of service. 

Affordability Safe Harbors

While the subsidy calculation used by the Exchanges to determine eligibility has been indexed for inflation since they opened, the same indexing hadn’t applied to the affordability safe harbor that employers are required to use. This update allows employers to use the indexed percentages as well when determining their affordability under the Employer Mandate beginning in 2015. The indexed percentage for plan years beginning in 2015 is 9.56 percent. For plan years beginning in 2016, employers can use 9.66 percent to determine whether their coverage is affordable. It will continue to be indexed in subsequent years. 

Employer Mandate Penalties

The IRS also confirmed the official, indexed penalties under the Employer Mandate for 2015 and 2016. For 2015, the Part A penalty, assessed if an employer fails to offer coverage to at least 70 percent of its full-time employees is $2,080 and the Part B penalty, a failure to offer coverage that is both minimum value and affordable to full-time employees, is $3,120. For 2016, the Part A penalty is $2,160 (and the requirement returns to the standard offer of coverage to at least 95 percent of the employers full-time employees) and the Part B penalty is $3,240. 

Hours of Service

A few gaps in the “hour of service” definition were also clarified. Hours of service don’t need to be credited in scenarios where an employee is receiving compensation while out on workers’ compensation leave, or if they’re receiving compensations solely from a disability payout. This clarification, however, doesn’t change the requirement to still credit hours for employees on FMLA. 

Employees of Organizations that Service Educational Institutions

Employees of organizations that service educational institutions are now subject to the same rule requiring hours of service to be credited over summer break unless the employee has the ability to earn hours of service by performing their job duties for other types of clients. For instance, a cafeteria worker who’s assigned to the educational sector would either need to be offered the ability to work for a different client during the educational institution’s prolonged breaks, or be credited hours of service during such breaks.  

Applicable Large Employer (ALE) / Aggregated ALE Calculation for Government Entities

As described in the preamble for the Employer Mandate final regulations, the IRS confirmed that government entities may apply a reasonable, good faith interpretation of the employer aggregation rules when determining whether or not a government entity is an ALE or ALE member and subject to the employer shared responsibility provisions and reporting requirements. 

Health Savings Account (HSA) Contributions for Individuals Receiving VA Benefits 

Individuals receiving Veterans Affairs (VA) benefits may make HSA contributions if the medical benefits consist solely of: disregarded coverage, preventive care or hospital care of medical services under any law administered by the Secretary of Veterans Affairs for service-connected disability. Any veteran with a disability rating would be considered eligible to contribute to an HSA. 

Health FSA Carryovers

If a plan allows for a Health FSA carryover, the employer can require that the employee must participate in the Health FSA for that next year in order for the funds to carry over. If an employee doesn’t elect to participate in the Health FSA the following year, any remaining funds would be forfeited. Again, this is allowed, but not required. If this provision is made, however, it would allow employees who wish to contribute to an HSA during the next year to do so without the automatic roll-over provision disqualifying them from contributing to the HSA. 

Health FSA Carryovers and COBRA

If an individual carried over unused funds into the new plan year and is then terminated from coverage and offered COBRA, COBRA premiums cannot be charged for the carryover amounts in the Health FSA. For example, if an employee carried over $500 into the new year, had elected $2,500 in that new year and hadn’t used any of the funds prior to their termination, COBRA premiums could only be charged on the $2,500 that was elected in the current plan year, although the $500 that was carried over would also be available if the employee elects COBRA for the Health FSA. 

Relief Relating to Employer Reporting

Finally, the IRS also reiterated that relief will be granted to ALEs who show that a good-faith effort was made to properly complete the reporting required under §6056. This doesn’t mean that penalties will not still be assessed for the failure to provide coverage that meets the requirements under the employer mandate, but rather penalties will not be assessed for a failure to properly fill out the forms themselves. Again, employers would need to be able to show that they made a good-faith effort to properly compete the reports. 


This IRS notice provided some key clarifications that may require employers to adjust their plan operations. It is important that you review these items to determine how they will affect your current plan. We’ll continue to keep you updated as clarifications and information arises. Please contact your Assurance representative with any questions.

Information contained herein is not intended to constitute tax or legal advice and should not be used for purposes of evading or avoiding otherwise applicable regulatory responsibilities as issued by the federal or state government(s) and/or taxes owed under the Internal Revenue Code.  You are encouraged to seek advice from your legal or tax advisor based on your circumstances.