The IRS has released interim guidance (Notice 2012-58) that establishes voluntary safe harbor methods that employers may use to determine which employees will be treated as “full-time” employees for purposes of determining “play or pay” penalties under healthcare reform. The definition of a “full-time employee” is crucial in determining whether, and to what extent, an employer may be liable for a “play or pay” penalty.
How Does This Affect You as an Employer?
Healthcare reform provides that an applicable large employer (50 or more “full-time” employees) may be liable for a penalty for any month in which one or more full-time employees purchase subsidized coverage through an Exchange. The law defines a “full-time employee” for this purpose as an employee who, for any month, works an average of at least 30 hours per week.
Making the “full-time employee” determination on a monthly basis can create significant administrative difficulties for employers, especially for employees with variable work schedules, seasonal employees, or new employees with uncertain schedules. To assist employers with these difficulties, the interim guidance allows an employer to avoid a month-by-month determination of full-time status and instead permits employers to use various “look back” periods and “look forward” periods in determining whether an employee meets the definition of a “full-time” employee. The lengths of these periods are determined by employer and are defined as follows:
Measurement Period (look back)
Time period from 3 – 12 months in which employer would track hours to determine whether the employee worked an average of more than 30 hours per week.
Stability Period (look forward)
Time period from 6 – 12 consecutive months in which employer must provide health insurance coverage to those employees that worked more than 30 hours per week in the Measurement Period.
(Must be at least 6 months and can not be shorter than the Measurement Period).
Administrative Period (waiting period)
Time period not to exceed 90 days which falls between the Measurement Period and Stability Period.
Waiting period intended to allow employer to analyze eligibility of “full-time employees” and provide enrollment information.
The safe harbor guidance provides that the Measurement Period, Stability Periods and Administrative Periods must apply uniformly to all employees in the same employment classification. There are only four permissible classifications:
- Collectively bargained and non-collectively bargained employees;
- Salaried and hourly employees;
- Employees of different business entities; and
- Employees located in different states.
The guidance allows employers to use measurement periods and stability periods that differ either in length or in their starting and ending dates for each category.
To illustrate these complex safe harbors, IRS Notice 2012-58 provides the following:
New Variable Hour Employees - based on the facts and circumstances at the employee’s start date, it cannot be determined if the employee is reasonably expected to work on average at least 30 hours per week.
- Employers have the option to use a “look-back” Measurement Period of between 3 and 12 months and enjoy a free pass for up to the first 12 months of a new variable hour employee's employment before having to potentially provide health insurance to those employees.
- The employer tracks the employee’s hours over a 3 to 12-month initial Measurement Period that begins on or near the employee’s start date.
- If the employee did average at least 30 hours per week during the initial Measurement Period, then the employee is treated as a “full-time employee” for the following initial Stability Period.
- If the employee failed to average 30 hours per week, the employer may treat the employee as part-time and not have to cover the employee for the following initial Stability Period.
Example: ABC, Inc. uses a 12-month initial Measurement Period for newly hired variable hour employees, beginning on the first of the month following the employee’s start date.
Ann, a new employee, is hired on July 16, 2014. Ann’s initial Measurement Period will run from August 1, 2014, to July 31, 2015. Thus, there is a short Administrative Period that runs from Ann’s start date (July16, 2014) to the first of the next month (August 1, 2014), when her initial Measurement Period begins. If Ann averages 30 or more hours per week, she must be offered coverage for her initial Stability period for the time period from August 1, 2015 to July 31, 2016.
Ongoing Variable Hour Employees - an employee who has been employed with the employer for at least one complete Measurement Period.
- To determine full-time status, the employer looks back over a Measurement Period to calculate which employees averaged at least 30 hours per week.
- Employees who averaged at least 30 hours per week during the Measurement Period are automatically treated as full-time employees during the Stability Period”, which begins after the Measurement Period.
- For employees who qualify as full-time, the Stability Period must be at least 6 months and no shorter than the Measurement Period.
- If the employer uses a three-month, four-month or five-month Measurement Period, the Stability Period that follows would have to be at least six consecutive calendar months.
Example: Assume the employer uses a 12-month Measurement Period that runs from November 1st to the following October 31st each year. This is followed by a 60-day Administrative Period and followed in turn by a 12-month Stability Period beginning each January 1st.
Ann, an ongoing employee, averages at least 30 hours per week for the time period from November 1, 2013 to October 31, 2014 (Measurement Period). The employer must treat Ann as a “full-time” employee and must provide health insurance coverage from January 1, 2015 to December 31, 2015 (Stability Period). The waiting period from November 1, 2014 to December 31, 2014 is the Administrative Period.
What Should I Do Next?
Employers in industries with highly variable workweeks or high employee turnover should review this guidance carefully and determine the risk of incurring a “play or pay” penalty.
Although the “play or pay” rules will not take effect until January 1, 2014, employers will want to begin planning for the implementation of the rules before that date. In fact, any employer planning to use the safe harbor for identifying “full-time” employees during 2014 must begin counting hours of service during 2013.
The following action steps are recommended:
- Determine the measurement periods and stability periods to be used for each allowable classification of employee;
- Determine if any administrative periods will be used;
- Discuss and determine the method your organization will use to track employee working hours and engage your payroll provider, as needed; and
- Consider revising benefit eligibility hours to potentially avoid any issues under “play or pay”.
Employers can rely on these safe harbor methods for determining full-time employees through the end of 2014. Employers will not be required to comply with any subsequent guidance that is more restrictive until at least January 1, 2015.
Additional guidance is expected from the government and Corporate Synergies will keep you updated with the latest information.
If you have any additional questions regarding the information within this eCommunication, please call Corporate Synergies at 1.866.CSG.1719 or CLICK HERE to contact us today.
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