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

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.

Alden J. Bianchi
In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.