United States: The Affordable Care Act's Reporting Requirements For Carriers And Employers (Part 7 Of 24): Mergers And Acquisitions

Last Updated: September 2 2015
Article by Alden J. Bianchi

When it comes to mergers and acquisitions involving at least one applicable large employer (ALE), the substantive rules governing employer shared responsibility (under Internal Revenue Code § 4980H) and the corresponding reporting rules (under Internal Revenue Code § 6056) share at least one thing in common: we don't yet know how they work. This leaves parties to corporate deals with some challenging questions: How should acquired employees be treated? Does the form of the transaction matter? Do "successor employer" rules of the sort found in the COBRA final regulations apply? Are the parties free to apportion exposure? What presumptions might be invoked if the matter of Affordable Care Act (ACA) compliance is not addressed? What exactly was Tom Brady's role in "deflate gate"?

A recent program sponsored by the American Bar Association Center for Continuing Legal Education on the subject of the ACA reporting rules included a discussion of the reporting aspects of mergers and acquisitions in which Treasury Department and IRS representatives participated. Because the official position of the government may only be enunciated in formal written guidance, the opinions voiced by the government representatives were not binding. They were, rather, their own informal views. The program nevertheless provided some useful hints as to how mergers and acquisitions would be treated for ACA purposes.

Background—what we do know

That the ACA's employer shared responsibility rules will play a role in mergers and acquisitions is clear from the statute. Code § 4980H(c)(2)(C)(iii) provides that, for purposes of determining whether an employer is an ALE, any reference to an employer includes a reference to any predecessor of the employer. In addition, in the case of an asset deal, a purchaser may become responsible for certain of the seller's tax, benefits and employment liabilities under the successor employer doctrine, this despite that the asset purchase agreement expressly excludes these liabilities by its terms.

Predecessor and successor employers

Here is what the final regulations under Code § 4980H have to say about predecessor and successor employers:

"Predecessor employer. [Reserved]" Treas. Reg. § 54.4980H-1(a)(36).

The preamble to the final regulation is modestly more forthcoming. It reads, in relevant part:

"As with the proposed regulations, the final regulations reserve with respect to specific rules for identifying a predecessor employer (or the corresponding successor employer). 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." 79 Fed. Reg. p. 8,548 (Feb. 12, 2014).

Under the successor employer rules set out in Treas. Reg. § 31.3121(a)(1)–1(b), where an employee works for more than one employer during the calendar year, the combined amount of wages subject to the employee portion of the Social Security tax is capped at the Social Security wage base. There is no exception permitting an employer to reduce or eliminate withholding the Social Security tax from the employee's wages when the employee receives wages from a second employer or multiple employers during the calendar year, even when the employee has reached the Social Security wage base taking into account wages paid by another employer or a combination of employers. There is rather a mechanism for claiming a refund on the employee's individual income tax return.

An exception applies in the case of an asset sale. For purposes of determining whether a successor employer has reached the Social Security wage base, the successor employer is allowed to take credit for the wages that a predecessor employer paid to an employee during the calendar year if the following conditions are satisfied:

  • The successor acquired substantially all the property used in a trade or business or used in a separate unit of a trade or business, of the predecessor;
  • The employee was employed in the trade or business of the predecessor immediately prior to the acquisition and is employed by the successor in its trade or business immediately after the acquisition; and
  • The wages were paid during the calendar year in which the acquisition occurred and prior to the acquisition.

The successor employer doctrine

In the benefits context, the best known instance of the successor employer doctrine arises under COBRA. In an asset sale, where the seller or a related entity continues to maintain a health plan, terminating employees who lose health coverage are entitled to be offered COBRA, even if hired by the buyer and offered coverage under the buyer's plan. If neither the seller nor any related entity has a group health plan following an asset sale, and the buyer continues the business operations associated with the purchased assets without interruption or substantial change, the buyer is considered a successor employer and responsible for COBRA coverage.

The Final Code § 4980H regulations and Notice 2014-49

The final Code § 4980H regulations include extensive and complex rules that apply to an employee who experiences a change in employment status, from a position for which the look-back measurement method is used, to a position for which the monthly measurement method is used (or vice versa). But the final regulations did not address whether, or under what conditions, an employer that uses a measurement method for a category of employees may subsequently change that measurement method. Instead, the preamble to the final regulations makes the following promise:

"The Treasury Department and the IRS anticipate that the rules with respect to a transfer from a position to which one lookback measurement method applies to a position to which another look-back measurement method applies will require complex rules because the methods may differ not only in the length of the applicable measurement and stability periods, but also the starting dates of the measurement periods. . . . To provide for these rules in the most comprehensible format, as well as to ensure flexibility to address situations that arise that have not currently been contemplated, the final regulations provide that with respect to the determination of full-time employee status, the Commissioner may prescribe additional guidance of general applicability, published in the Internal Revenue Bulletin."

In Notice 2014-49, the IRS made good on its promise. Specifically, the notice addresses two situations: The first applied to an "Employee transferring from a position to which one measurement period applies to a position to which a different measurement period applies," and the second relates to "Employer-initiated changes in measurement methods for one or more permissible categories of employees." (See our previous post on Notice 2014-49 for further explanation.)

At the end of Notice 2014-49, the IRS gives us the following clue as to how they might address mergers and acquisitions:

"Until further guidance is issued, and in any case through the end of calendar year 2016, taxpayers involved in a corporate transaction in which employers use different measurement methods may rely on the approach described in this notice in determining an employee's status as a full-time employee for purposes of § 4980H. . . .

Recognizing that the approach described in the immediately preceding paragraphs to addressing the consequences of corporate transactions is not necessarily the only permissible approach and might in some cases present practical issues, the Treasury Department and the IRS encourage comments on this and other possible approaches."

The issue that the IRS addresses here relates to instances in which one of the parties to the deal has chosen to use the look-back measurement method to determine full-time employee status. Where both the buyer and seller have elected to use the monthly measurement method, the merger or acquisition is a non-event.

Some examples—stock and asset deals

Set out below are the examples discussed during the above cited ABA Center for Continuing Legal Education program.

  • Stock deal—ALE acquires non-ALE

Alpha Group (an ALE) acquires the stock of Tiny Corp (a non-ALE) in 2015. The question arises, when does Tiny Corp. become an ALE member? And does it matter whether Tiny Corp. is a wholly-own subsidiary of Alpha Group or if Tiny Corp. is merged up into Alpha Group?

The rules governing when an employer becomes an ALE generally look to the prior calendar year. Particularly where Tiny Corp. is maintained as a wholly-own subsidiary of Alpha Group, might Tiny Corp. avoid ALE or ALE member status until 2016? In the regulator's view at least, the answer was no. Thus, 1095-Cs would need to be provided to Tiny Corp.'s employees. For months prior to the effective date of the deal, Tiny Corp. employees would be coded as not employed (i.e., Code 2A. Employee not employed during the month). It was generally agreed that no substantive pre-merger information would be required, nor would Tiny Corp. have any exposure pre-merger. This result is the same, though marginally more compelling, if Tiny Corp. is merged into Alpha Group.

  • Stock deal—ALE acquires ALE

Alpha Group (an ALE) acquires the stock of a subsidiary of Beta Group (which is also an ALE). Since both parties are already ALEs, reporting is required. But what controlled group members are included in Form 1094-C, Part IV filed by Alpha Group, and by Beta Group, the acquired subsidiary? Since the purpose of Form 1094-C, Part IV is to apprise the IRS of any sources of exposure, it is likely any rule that the Treasury Department and IRS adopt will provide that the reporting will include all entities even if not part of the group of employers under common control for the entire year.

  • Asset purchase

Alpha Group (an ALE) acquires the assets of Charlie Co. In connection with the sale, Charlie Co. terminates all of its employees. Alpha Group hires some, but not all, of Charlie Co.'s former employees. Are there any circumstances under which Alpha Group would need to report its newly-hired employees (former Charlie Co. employees) as other than new employees in applying the look-back measurement method?

Based on the above-cited text from Notice 2014-49, it's pretty clear (to the author at least) that the IRS intends to apply some sort of successor employer rule here. Whether the IRS would be able to enforce such a rule absent further guidance is another matter entirely. In the case of an asset sale, the parties may agree to treat the buyer as a successor employer. But even in this case, it's not clear whether that would be sufficient to be the basis for exposure for assessable payments under Code § 4980H.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Alden J. Bianchi
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions