Beginning 2014, certain employers must offer their employees appropriate health coverage or be subject to a tax penalty. See our article dated July 5, 2012. This "pay or play" penalty under health care reform applies to large employers, which the Affordable Care Act considers to be employers with 50 or more full-time equivalent employees. Under the rules, a monthly penalty may be imposed on a large employer when certain of its full-time employees receive subsidized health insurance coverage through a state health insurance exchange, if the employer does not offer health coverage or if the health coverage offered by the employer does not provide minimum value. Employers will have to be able to calculate the number of full-time employees they employ in order to determine if they will be subject to the pay or play penalty.
The Department of Treasury recently released guidance on safe harbor methods employers may use (but are not required to use) to determine which employees should be treated as full-time. Employers may rely on the guidance through 2014.
The new guidance supplements prior rulings which set forth rules for determining who is full-time for purposes of the pay or play penalty. A full-time employee is one who is reasonably expected to work on average at least 30 hours per week. To determine the hour per week threshold, prior guidance instructed an employer to use a "look-back period" called a standard measurement period to determine the average hours an employee worked in a prior period, and then apply those hours to a fixed period going forward, called the "stability period."
Generally, the new guidance addresses ongoing employees, new employees, and the transition between the two. Employers may implement different measurement periods and stability periods for different categories of employees (for example, for union and non-union employees), but all categories of employees must be treated the same.
Ongoing Employee
- An "ongoing employee" is generally an employee who has been employed for at least one complete standard calculation period.
- Under the safe harbor, an employer determines each ongoing employee's full-time status by looking back at the standard measurement period (not less than three but not more than 12 consecutive calendar months, as selected by the employer). The standard measurement period must be applied consistently for all employees in the same employment category.
- If the employer determines that an employee worked an average of at least 30 hours per week during the standard measurement period, then the employer treats the employee as full-time for the look-forward "stability period." This is the case regardless of the number of hours the employee actually works during the stability period. Likewise, an employee who is not considered full-time based on the standard measurement period may be considered not full-time for the following stability period. However:
- For a full-time employee, the stability period must be at least six consecutive calendar months that is no shorter in duration than the standard measurement period. This go-forward period must begin after the standard measurement period and any administrative enrollment period.
- For an individual who is determined not to be full-time, the employer may continue to treat the employee as not full-time during a stability period that is not longer than the look-back standard measurement period.
- If the employer determines that an employee worked an average of at least 30 hours per week during the standard measurement period, then the employer treats the employee as full-time for the look-forward "stability period." This is the case regardless of the number of hours the employee actually works during the stability period. Likewise, an employee who is not considered full-time based on the standard measurement period may be considered not full-time for the following stability period. However:
New Employee
- New employees who are reasonably expected to work full-time are considered full-time employees.
- Variable Hour and Seasonal New Employees
- Certain other new employees may not be automatically considered full-time. An employee is considered a variable hour employee if when the employee begins employment, it cannot be determined if the employee is reasonably expected to work an average of 30 hours per week. There is no formal definition of seasonable employee, so employers can use a reasonable, good-faith interpretation of the term.
- For determining full-time status of variable hour and seasonal employees, an employer uses an "initial measurement period" of between three and twelve months (as selected by the employer). The employer measures hours worked by the new employee during the initial measurement period. If the employee works 30 or more hours per week, the individual is treated as full-time. The stability period (the go-forward calculation period) must be the same length as the period used for ongoing employees.
- If a variable hour or seasonal employee is determined to be full-time during the initial measurement period, the go-forward stability period selected by the employer must be at least six consecutive calendar months, but can be no shorter than the initial measurement period. The stability period must begin after the initial measurement period and any associated administrative period.
- If a variable hour or seasonal employee is determined to not to be full-time during the initial measurement period, the employer may treat the employee as not full-time for the go-forward stability period. This period must not be more than one month longer than the initial measurement period and may not exceed the remainder of the standard measurement period (plus any administrative period).
- After a new employee has has been employed for a certain period of time, the employee must be treated as other ongoing employees.
Transition from New Employee to Ongoing Employee
- Once a new employee has been employed for an entire standard measurement period, the employee must be tested for full-time status, at the same time as other ongoing employees.
- An employee who determined to be full-time during either an initial measurement period or a standard measurement period must be treated as full-time for the entire associated go-forward stability period. This is the case even if the employee is no longer full-time during the subsequent period.
- In contrast, a new employee who is determined not to be full-time during the initial measurement period, but is determined to be full-time during a stability period (either overlapping or immediately following), the employee must be treated as full-time for the entire go-forward stability period.
The new guidance provides many specific examples illustrating the various full-time calculation scenarios. The Treasury Department confirms that the guidance is optional for employers and applies only for calculation periods beginning in 2013 or 2014. Comments on the proposed rules are encouraged, and the IRS poses specific questions for which it requests feedback for future modifications to the guidance.
While use of the new guidance is not mandatory, employers will certainly have to develop reasonable methods for calculating the number of their full-time employees for purposes of the pay or play penalty under health care reform. It is likely that many employers will follow the new IRS safe-harbor in performing their employee calculations.
