The Department of Labor has now provided long-awaited guidance on how the employer shared responsibility provision of the Affordable Care Act (ACA), also known as the “employer mandate”, interacts with fringe benefit requirements of the McNamara-O’Hara Service Contract Act, Davis-Bacon Act, and Davis-Bacon Related Acts.
The guidance, in the form of an All Agency Memorandum addressed to federal contracting agencies, is consistent with how many of us have already been viewing the interplay. Still, the Memorandum offers helpful clarity and confirmation that our reading of the interplay between these federal laws has been on target.
Background on the Laws
The ACA’s employer shared responsibility provisions require applicable large employers to offer full-time employees affordable, minimum essential coverage. If an employer declines to offer such coverage, and an employee receives the premium tax credit for purchasing coverage through the Exchange, that employer may be subject to an assessable payment in the form of a non-deductible excise tax.
The Service Contract Act and Davis-Bacon Act generally require that workers employed on federal service contracts over $2,500 and construction contracts over $2,000 respectively be paid prevailing wages and fringe benefits. The Service Contract Act obligates employers to provide scheduled amounts of health and welfare fringe benefits.
Under Davis-Bacon, the prevailing wage that must be paid is comprised of both a base hourly rate of pay and any fringe benefits found to be prevailing. Davis-Bacon allows a covered employer to satisfy its basic obligation by paying fringe benefits, with health insurance being one such benefit that will be counted.
Covered employers are able to take Service Contract or Davis-Bacon credit for the ACA compliant health benefits they provide to employees in order to avoid an IRS penalty.
However, employers who are assessed an ACA penalty – either for failing to offer ACA compliant coverage, or such coverage that is affordable – cannot credit the cost of the penalty toward Service Contract or Davis Bacon obligations.
An important point that the Guidance restated was that it is the employer – not the employee – who can dictate whether an employer will provide fringe benefits in the form of health coverage instead of providing a cash payment or some other fringe benefit payment. Thus, an employer subject to the ACA need not provide its employees the option to decline coverage, if the health plan the employer offers complies with the ACA’s requirements.
The intersection of these federal laws was uncharted territory until now so it is somewhat of a relief to receive this Memorandum and have our suppositions confirmed..