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The Affordable Care Act – Penalties? No! The IRS Safe Harbor for Applicable Large Employers (Part 4 of 8), by Barbara Halpin

Posted by Attorney Roger L. Pettit / Comments

I’m not going to lie.  The IRS safe harbor for employers to use to help prevent penalties for noncompliance is somewhat convoluted.  I’ve tried to make this as readable as possible.

So let’s jump right in.  The IRS has offered a safe harbor for applicable large employers to use to ensure that the right employees (full-time) are receiving coverage.  It’s important to note that all employees considered full-time under the Act must be offered coverage if the employer is an applicable large employer.  So an employer might only have ten employees who are actually full-time (30 hours per week) but have an additional 40+ “full-time equivalent” employees based upon the number of hours all of the part-time employees are working therefore making the employer an “applicable large employer” and subject to the Act.  All of these part-time hours, divided by 120, equals the number of full-time equivalent employees that an employer has (see my previous post here).

Safe Harbor for Ongoing Employees

The safe harbor to be applied for ongoing employees is called the “look-back method.”  Even though the final regulations have not been published yet, the IRS has stated that employers can rely on the safe harbor through 2014.  An employer determines each ongoing employee’s full-time status by “looking back” at a “standard measurement period” which is a defined period of time of not less than three months but not more than twelve consecutive months.  An ongoing employee is defined as an employee who has been employed by an applicable large employer for at least one complete standard measurement period.  The time period is chosen by the employer and may or may not be the calendar year.

If the employer determines that an employee averaged at least 30 hours per week during the standard measurement period, then the employer treats the employee as full-time during the subsequent “stability period,” regardless of the employee’s number of hours during the stability period (as long as the person remained an employee).  For employees whom the employer determine are full-time during the standard measurement period, the stability period is a period of at least six consecutive months that is no shorter in duration than the standard measurement period and that begins after the standard measurement period.

If the employee is determined not to have worked full-time during the standard measurement period, the employer may treat the employee as a non-full-time employee during the subsequent stability period.  This stability period cannot be longer than the standard measurement period.

The “standard measurement period” must be made on a consistent basis for all employees in that same category.  Categories include (1) each group of collectively bargained employees covered by a separate collective bargaining agreement; (2) collectively bargained employees and non-collectively bargained employees; (3) salaried employees and hourly employees and (4) employees whose primary places of employment are in different states.

Employers may also use a period of time called the “administrative period” between the standard measurement period and the stability period.  This is a period of time (up to 90 days) for employers to determine which ongoing employees are eligible for coverage. It cannot lengthen the time of the measurement period or the stability period.

If an ongoing employee’s position of employment or other employment status changes before the end of a stability period, the change will not affect the application of the classification of the employee as a full-time employee (or not a full-time employee) for the remaining portion of the stability period.  So if an ongoing employee is not treated as a full-time employee during a stability period because the hours during the prior measurement period were insufficient for full-time-employee treatment, and the employee changes his or her position of employment that increases the hours of service, the employee remains treated as a non-full-time employee and does not need to be offered coverage.

Here is a simple example of employer use of a measurement/stability period:                                          

            Employer M, an applicable large employer, did not hire any new employees in calendar year 2014.  Employer M elects to use a 6-month measurement period and a 6-month stability period for purposes of determining its full-time employees. The first measurement period runs from January 1, 2014 through June 30, 2014 and the associated stability period runs from July 1, 2014 through December 31, 2014.

Employer M determines each employee’s full-time status by looking back to determine whether the employee averaged at least 30 hours of service per week from January 1, 2014 through June 30, 2014 by totaling each employee’s hours of service during that measurement period and dividing that total by the number of weeks in that measurement period.

The employees determined to be full-time based on their hours of service during the first measurement period are considered to be full-time for each month in the stability period from July 1, 2014 through December 31, 2014 and must be offered coverage.                

There are many more examples in the IRS temporary regulations but for purposes of this blog, I’m trying not to go into too much detail.   It’s also important to understand that in using the measurement/stability period process, once a measurement period occurs and a stability period begins, the first stability period and the second measurement period are necessarily occurring at the same time in order for there to be continual coverage.  There can’t be a measurement period, then a stability period and then a second measurement period during which no coverage is offered to full-time employees (during the second measurement period) – measurement periods and stability periods overlap.

Safe Harbor for New Employees

The following rule for new employees may be modified in the final regulations, but can be relied on by employers through 2014 even if the final regulations modify the rule. A “new employee” defined as an employee who has been employed by an applicable large employer for less than one complete standard measurement period.

The basic rule is that an employee that is reasonably expected to work full-time (average 30 hours of service per week and who is not a seasonal employee) must be offered coverage within 3 months of starting.  If an employer offers coverage to the employee at or before the conclusion of the initial three months of employment the employer will not be subject to the employer responsibility payment (penalty).

The first standard measurement period is called the “initial measurement period”.  It’s a time period selected by an applicable large employer of at least 3 consecutive calendar months but not more than 12 consecutive calendar months used by the applicable large employer as part of the process of determining whether certain new employees are full-time employees under the look-back measurement method.

Safe Harbor for Variable Hour and Seasonal Employees

The following rule for variable hour and seasonal employees may also be modified in the final regulations, but can be relied on by employers through 2014 even if modified.  A new employee is a “variable hour” employee if, based on the facts and circumstances at the start date, it cannot be determined that the employee is reasonably expected to work, on average, at least 30 hours per week.

A new employee who is expected to work initially at least 30 hours per week may be a variable hour employee if, based on the circumstances at the start date, the period of employment at more than 30 hours per week is expected to be of limited duration and it cannot be determined that the employee is to work an average of 30 hours per week over the initial measurement period.   (Example - a retail worker during the holidays may work over 30 hours per week but this won’t continue during the initial measurement period past the holidays).

If a large employer uses the Look-back Measurement method for its ongoing employees, it may use it for new variable hour and for seasonal employees.  During the initial measurement period of between three and twelve months, the employer measures the hours of service for the new variable or seasonal employee and determines whether the person is employed an average of 30 hours per week or more.  The stability period length used must be the same used for ongoing employees.

If the employee is determined to be full-time during the initial measurement period, the stability period must be a period of least six consecutive calendar months that is no shorter in duration than the initial measurement period and must begin immediately after the initial measurement period.  That employee must be covered during the stability period if it was found, during the initial measurement period, that the employee is a full-time employee.

If a new variable hour or seasonal employee is determined not to be full-time during the initial measurement period, the employee may be treated as a non-full-time during the following stability period.  The stability period for variable hour and seasonal employees determined not to be full-time must not be more than one month longer than the initial measurement period.

Next week I will write a post on the potential penalties employers face, a much more straight-forward topic.

 

 

 

 

Attorney Roger L. Pettit
Attorney Roger L. Pettit

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