The IRS has issued proposed regulations (and related FAQs) addressing various aspects of the ACA's employer mandate. Under the employer mandate, "applicable large employers" are subject to a penalty if the employer either:

The proposed regulations expand on guidance provided in four prior IRS notices addressing the employer mandate (including IRS Notice 2012-58, see Legal Update, Guidance Addresses 90-day Waiting Period, Full-time Employees for Employer Mandate), including:

An applicable large employer is an employer that employed an average of at least 50 full-time employees, including full-time equivalent employees (FTEs), during the prior calendar year. The determination of applicable large employer status is based on employees' actual hours of service in the prior year. Reflecting the common law standard, an employee/employer relationship generally exists when the person for whom services are performed has the right to control and direct the individual who performs those services. Leased employees, sole proprietors, partners and 2% S-corporation shareholders are not treated as employees for this purpose.

Controlled group rules apply in calculating the number of full-time employees and FTEs (see Practice Note, Controlled Group and Affiliated Service Group Rules). However, the proposed regulations clarify that for a year during which an employer is an applicable large employer, the employer mandate rules are applied separately to each controlled group member (referred to as an "applicable large group member") in determining both the liability for, and amount of, any penalty.

Although predecessor employers are included in the applicable large employer determination, the proposed regulations do not provide rules for identifying predecessor and successor employers. Also, for purposes of an exception from large employer status for seasonal workers (which are not limited to agricultural or retail workers), employers can apply either a period of:

A full-time employee is an employee employed on average at least 30 hours of service per week, with 130 hours of service in a month being the monthly equivalent of service per week. The proposed regulations:

For hourly employees, employers must calculate actual hours of service based on records of hours worked and hours for which payment is due (for example, for disability). For non-hourly employees, employees may use one of three methods:

Employers need not use the same method for all non-hourly employees, and may apply different methods for different classifications of non-hourly employees, provided that the classifications are reasonable and consistently applied.

Hours of service generally do not include hours of service worked outside the US.

An applicable large employer is subject to a penalty if the employer fails to offer coverage to its full-time employees and their dependents. The proposed regulations define dependent as an employee's child who is under 26 years of age.

As addressed in the preamble to the proposed regulations, an applicable large employer may choose to amend its cafeteria plan to permit either (or both) of the following changes in salary reduction elections, which apply regardless of whether employees experience a change of status event under the cafeteria plan regulations:

Employers that wish to allow the change in election rules permitted under this transition relief for fiscal plan years must incorporate the rules in their written cafeteria plans. Cafeteria plans can be amended retroactively to implement these transition rules. The retroactive amendment must be:

The proposed regulations provide that an employer will be treated as offering coverage to its full-time employees (and their dependents) for a month if it offers coverage for that month to all but 5% or, if greater, five of its full-time employees (provided that an employee is treated as having been offered coverage only if the employer also offered coverage to that employee's dependents).

The employer mandate is effective for months after December 31, 2013, and employers can rely on the proposed regulations pending the IRS' issuance of final regulations or other guidance. If future guidance is more restrictive than the proposed regulations, it will not be applied retroactively.

The proposed regulations and IRS preamble cover a good deal of new terrain for large employers subject to the employer mandate penalties, though some of the regulations' core concepts were introduced in prior notices. The IRS is also apparently concerned with potential attempts by employers to evade compliance with the employer mandate, for example, using structures involving temporary staffing agencies. According to the preamble, the final regulations will include anti-abuse rules intended to address these situations.

Also, in several instances the preamble references topics on which additional guidance will be issued, including the definition of minimum essential coverage and eligible employer-sponsored plans, the meaning of minimum value and information reporting of employer-provided health coverage.