In August, the Department of the Treasury, the Department of Labor, and the Department of Health and Human Services (the “Departments”), issued guidance on how to determine full-time employee status for purposes of the employer shared responsibility provisions (sometimes referred to as the “pay or play” provisions) of the Patient Protection and Affordable Care Act (“PPACA”). This guidance is particularly useful for employers with large populations of part-time, variable hour and/or seasonal employees. At the same time, the Departments issued guidance on PPACA’s 90-day waiting period limitation. The IRS has stated that this guidance is effective for plan years beginning on or after January 1, 2014, and employers may rely on this guidance through the end of 2014 (after which time more restrictive guidance may be issued).
Employers should carefully review these two new pieces of guidance. We note that, in order to comply with PPACA’s employer shared responsibility provisions effective January 1, 2014, employers will need to begin tracking employee hours in 2013.
IRS Notice 2012-58 Guidance on How to Determine Full-Time Employee Status
PPACA’s employer shared responsibility provisions, found in Code section 4980H, become effective January 1, 2014. They provide that a large employer (i.e., an employer who employed on average at least 50 full-time employees on business days during the preceding calendar year) may be subject to penalties if any “full-time employee” (i.e., an employee who is employed on average at least 30 hours per week) obtains coverage through either a state based exchange or a federally facilitated exchange, and is certified to receive a premium tax credit or cost-sharing reduction because either:
- the employer does not offer its full-time employees (and their dependents) the opportunity to enroll in a group health plan offering “minimum essential coverage;” or
- the employer offers its full-time employees (and their dependents) the opportunity to enroll in a group health plan, but the plan is considered unaffordable or does not provide minimum value.
Given the penalties involved, it is critical for employers to determine which of their employees have “full-time” employee status. The Departments recognize that it would be challenging for employers to determine an employee’s “full-time status” on a monthly basis. This type of determination would force employers to enroll (or dis-enroll) certain employees as frequently as on a monthly basis. Recognizing that this type of monthly determination does not work, in Notice 2011-36 the Departments proposed using a “look back period” approach for determining an employee’s full-time status. Under this “look back” approach, an employer would determine each employee’s full-time status by looking back at a measurement period to determine whether an employee averaged at least 30 hours of service per week. If the employee was determined to be a “full-time employee” during this measurement period, then the employee would be treated as a full-time employee during the subsequent “stability period,” regardless of the number of hours of service the employee actually worked during the stability period. Notice 2012-58 expands upon the “look back/stability” approach proposed in Notice 2011-36. Under Notice 2012-58, the “look back/stability period safe harbor” approach varies depending on whether an employee is:
- an “ongoing employee;”
- a newly-hired employee who is reasonably expected to work full-time;
- a newly-hired “variable hour” or ’seasonal employee;”or
- transitioning from newly-hired to ongoing status.
The approach for each employment status is described below.
Notice 2012-58 provides that for purposes of determining an ongoing employee’s “full-time status”, an employer may utilize a “standard measurement period” of between three to twelve consecutive months to determine whether an “ongoing employee” is a full-time employee. Notice
2012-58 defines an “ongoing employee” as an employee who has worked for the employer for at least one complete standard measurement period. Notice 2012-58 further clarifies that an employer may use different ’standard measurement periods” for specified categories of employees (as long as this determination is applied on a uniform and consistent basis for all employees in the same category). Permissible categories include:
- Collectively bargained and non-collectively bargainedemployees
- Salaried and hourly employees
- Employees of different entities
- Employees in different states
Once the employer determines that an employee has averaged at least 30 hours per week during the standard measurement period, it must treat the employee as a “fulltime employee” during the subsequent ’stability period.” This ’stability period” must be at least six consecutive months, or the duration of the ’standard measurement period,” if longer. For example, if the employer’s standard measurement period was 12 months, the subsequent stability period must be 12 months. If the employer determines that the employee did not average at least 30 hours per week during the ’standard measurement period,” then the employer is allowed to classify the employee as a “part-time” employee during the subsequent stability period, provided that the subsequent stability period is not longer than the ’standard measurement period.”
Notice 2012-58 recognizes that employers will need time after the ’standard measurement period” ends to determine an employee’s eligibility, to provide employees with notification regarding their eligibility status and to enroll any applicable employees in plan coverage. Accordingly, Notice 2012-58 provides employers with the option of using an “administrative period” which may last up to 90 days. To prevent ongoing employees from experiencing a gap in plan coverage, the “administrative period” must overlap with the prior stability period. For example, an employer could choose to have:
- a 12 month stability period running from January 1st through December 31st; and
- a standard measurement period beginning October 15th and ending October 14th, with an accompanying administrative period that runs from October 14th through January 1st.
Newly-Hired Employees Reasonably Expected to Work Full-Time
If an employer reasonably expects an employee to work full-time, the employee must be offered employer group health plan coverage by the end of the initial three-month period. The employer will not have to go through the process of tracking the employee’s hours by counting the employee’s actual weekly hours or by using the look-back safe harbor method described in Notice 2012-58. Accordingly, if an employer does not offer group health plan coverage beginning with the employee’s fourth month of employment, the employer will face potential penalties if the employee purchases subsidized insurance in a state based or federally facilitated exchange.
Newly-Hired Employees Variable Hour Employees and Seasonal Employees
In Notice 2012-17, the Departments requested comments on an approach for determining the full-time status of a new hire whose hours cannot reasonably be determined at the date of hire (e.g., because the employee is a variable hour or seasonal employee). Notice 2012-58 takes into account the comments that were submitted, and proposes an approach intended to provide employers with flexibility when determining the full-time status of a new variable hour or seasonal employee. For variable hour and seasonal employees, an employer is permitted to use an “initial measurement period” of between 3 and 12 months (as selected by the employer) to determine whether an employee is full-time. If an employee averages thirty or more hours per week during the “initial measurement period,” he or she must be provided plan coverage during the subsequent ’stability period.” Like the rules for “ongoing employees,” the ’stability period” must be at least six consecutive calendar months in length, and no shorter in duration than the “initial measurement period.”
If an employer determines that a newly-hired variable hour or seasonal employee does not have full-time status based on the hours worked during the initial measurement period, then the employer is permitted to treat such employee as not being a full-time employee during the subsequent stability period. However, this ’stability period” must not be longer than the shorter of:
- the initial measurement period plus one month; or
- the remainder of the standard measurement period for ongoing employees (plus any optional administrative period) in which the initial measurement period ends.
Transition from Newly-Hired Employee to Ongoing Employee
Notice 2012-58 also provides guidance regarding the rules to be followed when transitioning an employee from his or her “initial measurement period” to the plan’s ’standard measurement period.” The measurement rules for a newly-hired employee who becomes an ongoing employee are similar to the measurement rules used for qualified retirement plans. There will be an overlap in the year that contains the employee’s first anniversary from his or her date of hire. When a new employee has been employed for an initial measurement period, the employer must retest the employee’s full-time status again during the standard measurement period used for ongoing employees. If the employer determines that an employee has full-time employee status during an initial measurement period or standard measurement period, the employee must be treated as a full-time employee for the entire associated stability period. This rule is illustrated in the example below.
Example: Employer A has a 12 month standard measurement period running from October 15th and ending the following October 14th for coverage to become effective January 1st of the subsequent year. Employer A’s initial measurement period is the 12 month period starting on the date of a variable hour employee’s date of hire. Nate is a variable hour employee who is hired on May 10, 2014. If Nate averages at least thirty hours per week during the 12 month initial measurement period (i.e., May 10, 2014, through May 9, 2015), Employer A must offer Nate coverage starting July 1, 2015. If Nate does not average thirty hours per week during his 12 month initial measurement period (i.e., May 10, 2014, through May 9, 2015), Employer A does not have to offer him coverage. However, Employer A must re-test Nate’s status during the next “standard measurement period” (i.e., October 15, 2014, through October 14, 2015). If Nate averages 30 hours per week during this standard measurement period, he must be offered coverage no later than January 1, 2016.
Administrative Period for New Hires
Notice 2012-58 also provides for an optional “administrative period” for new hires to allow employers the time necessary to determine eligibility and to administer enrollment in the plan. The administrative period cannot exceed 90 days and must include all periods between the start date of the new hire and the date the employee is first offered coverage under the employer’s group health plan (other than the initial measurement period). Accordingly, if an employer begins the initial measurement period on the first day of the first month following a new variable hour or seasonal employee’s start date, the period between the employee’s start date and the first day of the next month must be taken into account in applying the 90-day limit on the administrative period. Further, the combined length of the initial measurement period and the administrative period cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee’s start date (i.e., the administrative period and the initial measurement period combined cannot exceed thirteen months plus a partial month). The following example helps illustrate this rule.
Example: Rose is a new variable hour employee for Employer B. Employer B has chosen to use a 12 month initial measurement period that begins on an employee’s start date, and applies an administrative period that runs from the end of an employee’s initial measurement period through the end of the first calendar month beginning on or after the end of the initial measurement period. Rose is hired on May 10, 2014. Her initial measurement period runs from May 10, 2014, through May 9, 2015. Rose works an average of 30 hours per week during this initial measurement period. Employer B offers coverage to Rose for a stability period that runs from July 1, 2015, through June 30, 2016. Because Rose works an average of 30 hours per week during her initial measurement period, and Employer B uses:
- an initial measurement period that does not exceed 12 months;
- an administrative period totaling not more than 90 days; and
- a combined initial measurement period and administrative period that does not last beyond the final day of the first calendar month beginning on or after the one-year anniversary of Rose’s start date (i.e., these periods do not last beyond June 30, 2015),
Employer B is not subject to any penalty under PPACA’s employer shared responsibility provisions provided that the coverage offered by Employer B provides minimum value and is affordable.
Notice 2012-59 90-Day Waiting Period Limitation under Public Health Service Act Section 2708
PPACA provides that for plan years beginning on or after January 1, 2014, group health plans (and health insurance carriers) may not apply any waiting periods that exceed 90 days. This requirement applies to insured and self-insured plans and to both grandfathered and non-grandfathered plans. A “waiting period” is defined as a period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective. Notice 2012-59 does not require an employer to offer health coverage to any employee. However, once an employer decides to offer coverage to a class of employees, it must comply with the 90-day waiting period rule with respect to those employees (regardless of their status as full-time or part-time).
Notice 2012-59 also clarifies that the 90-day waiting period will begin when an employee becomes eligible for coverage under the terms of the employer’s group health plan. Accordingly, a plan may impose eligibility rules (e.g., full-time status, receipt of a license, etc.) before group health plan coverage begins, unless such condition is designed to avoid compliance with the 90-day waiting period limitation. Notice 2012-59 provides several examples of plan designs that will not be considered to “avoid compliance” with the 90-day waiting period rules:
- If a plan requires that an employee complete a cumulative 1,200 hours of service in order to be eligible under the plan, this hours requirement is not considered as designed to avoid compliance with the 90-day waiting period rules. In this scenario, coverage must be offered to the employee no later than the 91st day after the employee first meets the 1,200 hours of service requirement. If a plan’s cumulative hours of service requirement is greater than 1,200 hours, the Departments would consider the hours requirement to violate the 90-day waiting period limitation.
- If a plan conditions eligibility on an employee being full-time and an employer cannot determine whether a new-hire is expected to work full-time (e.g., the employee has a variable work schedule) – the employer may take a reasonable period of time to determine the new employee’s full-time status. For example, the employer may use a 12 month initial measurement period (as provided for in Notice 2012-58 and discussed above) to determine the employee’s fulltime status. The use of this initial measurement period will not be considered an attempt to avoid compliance with the 90-day waiting period rules, if coverage is made effective no later than 13 months from the employee’s start date (plus, if the employee’s start date is not the first day of a calendar month, the period from the employee’s start date to the first day of the next calendar month).
Notice 2012-59 also clarifies that a plan will be in compliance with the 90-day waiting period rules if the plan terms allow an employee to elect coverage beginning on a date that does not exceed the 90-day waiting period limitation. Even if an employee chooses to elect coverage outside of the 90-day waiting period, an employer will have still met the 90-day waiting period limitation rules.
Employers, particularly those with large variable hour and seasonal employee populations (e.g., employers in retail, construction, hospitality, agriculture etc.) will need to carefully review these Notices. Employers will need to begin tracking employee hours as early as 2013 so that they may comply with the employer shared responsibilty provisions which become effective in 2014. Further, in light of this guidance, employers will need to review their plan documents to determine whether plan eligibility provisions require updating. If you have any questions regarding these Notices, please contact the authors of this article, or the attorney you normally work with.