Under the ACA, do employers need to offer coverage to employees working abroad?
David Pixley
Global employers face unique challenges in complying with the ACA. Employers that only employ U.S. citizens working abroad, being paid from foreign sources, are likely not subject to the ACA mandates. Employers employing at least 50 full-time employees (or full-time equivalents), working in the United States, are subject to the Employer Shared Responsibility provisions under section 4980H of the Code (often called the pay or play penalties). And for employers with employees working domestically and abroad, the analysis hinges on where each employee’s hours of service were performed and the source of the employee’s compensation.
Similarly, when determining whether you must offer coverage to an employee working abroad, you should look to the number of hours worked and the source of income for each hour of service. An employer can exclude hours of service performed abroad to the extent the related compensation is derived from sources outside of the U.S., regardless of citizenship. Conversely, if that same employee’s income is derived from a U.S. source, those hours of service must be included for purposes of determining if the employee is covered by the employer mandate. Employers should consult a qualified tax advisor to determine if income is derived from a foreign source or a domestic source.
Also, an employee that transfers from a domestic employer to a foreign employer (in the same controlled group) may be treated as terminated if the transfer is expected to continue for at least 12 months and the employee’s compensation will be derived from a foreign source. This result means an employer, even one using the lookback measurement method, does not have to offer coverage to this employee and won’t be subject to a penalty. If after twelve months, the same employee transfers back to a U.S. member company, he or she will generally qualify as a new employee. And whether he or she must be offered coverage will be governed by the same rules as all new employees.
Although tracking hours of service for each individual employee may be particularly burdensome for global employers, the penalties for failing to offer coverage may be far more costly. If you employ individuals working abroad, you should take the time to do this analysis before just assuming you don’t have to offer them coverage.
Global employers face unique challenges in complying with the ACA. Employers that only employ U.S. citizens working abroad, being paid from foreign sources, are likely not subject to the ACA mandates. Employers employing at least 50 full-time employees (or full-time equivalents), working in the United States, are subject to the Employer Shared Responsibility provisions under section 4980H of the Code (often called the pay or play penalties). And for employers with employees working domestically and abroad, the analysis hinges on where each employee’s hours of service were performed and the source of the employee’s compensation.
Similarly, when determining whether you must offer coverage to an employee working abroad, you should look to the number of hours worked and the source of income for each hour of service. An employer can exclude hours of service performed abroad to the extent the related compensation is derived from sources outside of the U.S., regardless of citizenship. Conversely, if that same employee’s income is derived from a U.S. source, those hours of service must be included for purposes of determining if the employee is covered by the employer mandate. Employers should consult a qualified tax advisor to determine if income is derived from a foreign source or a domestic source.
Also, an employee that transfers from a domestic employer to a foreign employer (in the same controlled group) may be treated as terminated if the transfer is expected to continue for at least 12 months and the employee’s compensation will be derived from a foreign source. This result means an employer, even one using the lookback measurement method, does not have to offer coverage to this employee and won’t be subject to a penalty. If after twelve months, the same employee transfers back to a U.S. member company, he or she will generally qualify as a new employee. And whether he or she must be offered coverage will be governed by the same rules as all new employees.
Although tracking hours of service for each individual employee may be particularly burdensome for global employers, the penalties for failing to offer coverage may be far more costly. If you employ individuals working abroad, you should take the time to do this analysis before just assuming you don’t have to offer them coverage.