Beginning in 2014, the shared responsibility provisions (also called the employer mandate provisions) of the Patient Protection and Affordable Care Act (“ACA”) generally will require every “applicable large employer” to offer at least 95 percent of its “full-time employees” the opportunity to enroll in an affordable health plan. Failure to offer affordable health plan coverage will expose such an employer to potentially significant penalties.
Recently proposed regulations provide guidance to help an employer determine whether it is an “applicable large employer” and which employees must be considered “full-time employees.” The proposed regulations confirm that the number and mix of an employer’s full-time and part-time employees during the remainder of 2013 can make a significant difference in determining whether the employer will be an applicable large employer when the employer mandate becomes effective in 2014. Each employee’s status as a full-time or part-time employee in 2013 will also be important for applicable large employers because (depending on the measurement periods selected) employee hours during 2013 will determine which employees must be offered affordable health plan coverage in 2014.
It is definitely not too early to start to analyze the extent to which the ACA’s employer mandate will apply beginning in 2014.
“Applicable Large Employer” Status
An applicable large employer is an employer that employed, on average, at least 50 full-time employees, taking into account full-time equivalent employees (“FTEs”), during the preceding calendar year.1 Because the employer mandate is generally effective in 2014, an employer’s initial status as an applicable large employer will be based on the number of full-time employees and FTEs employed during 2013. For 2014 only, an employer can choose to make its determination of applicable large employer status by reference to any period of at least six consecutive calendar months in the 2013 calendar year, rather than by reference to the entire 2013 calendar year.
An employer’s status as an applicable large employer for a calendar year is determined by adding the number of the employer’s full-time employees for each calendar month in the preceding calendar year to the total number of FTEs for each calendar month in the preceding calendar year, and then dividing the sum of those two totals by 12. (Employers electing to use the optional shorter measuring period for 2013 would divide by the number of months in the chosen measuring period, rather than by 12.) If the result is not a whole number, the result is rounded down to the next lowest whole number.
If the monthly average produced by this calculation is less than 50, then the employer is not an applicable large employer for the current calendar year and the employer is not subject to the employer mandate provisions of the ACA for that calendar year. If the result of this calculation is 50 or more, then the employer is an applicable large employer for the current calendar year and is subject to the employer mandate for that year.2 Applicable large employer status must be determined each year.
“Full-Time Employee” and FTE Status
For purposes of determining applicable large employer status, the term full-time employee generally means, with respect to a calendar month, an employee who is employed an average of at least 30 hours per week. An employee who is credited with 130 or more hours in a month is treated as employed at least 30 hours per week, provided that this equivalency rule is applied on a reasonable and consistent basis. All remaining employees (i.e., employees who were not employed on average at least 30 hours per week during the month) are then included in calculating the employer’s FTEs for that calendar month.
The number of FTEs for each calendar month is determined by calculating the aggregate number of hours of service for that calendar month for all employees who were not employed on average at least 30 hours per week (disregarding hours in excess of 120 for any employee) and dividing the aggregate number of hours by 120. For example, if the aggregate of all hours for all employees who are not full-time employees is 1,680 in a particular month, then the employer has 14 FTEs for that month (1,680 ÷ 120 = 14).
If the employer in the foregoing example also has 40 full-time employees (i.e., 40 employees who each worked an average of at least 30 hours per week) for the same month, then the employer will be deemed to have employed 54 full-time employees for that month. The employer would do similar calculations for each month of the preceding calendar year (or elected shorter period for 2013) and then average the monthly totals. As noted above, if the monthly average is 50 or more, then the employer is an applicable large employer for the current calendar year. If the average is less than 50, then the employer is not an applicable large employer for the current calendar year.
Employees Who Must Be Offered Coverage
If an employer is an applicable large employer, then that employer generally must offer affordable health plan coverage to at least 95 percent of its full-time employees or face potentially significant penalties for failing to do so. For this purpose, full-time employees means only actual full-time employees; that is, only those employees who are actually employed on average at least 30 hours per week must be offered affordable health plan coverage. An applicable large employer will not face any mandate-related penalties for failing to offer health plan coverage to employees taken into account as FTEs.
To provide some predictability in who must be offered coverage, the proposed regulations generally allow an affected employer to adopt a “standard measurement period” that will be the basis for determining if an employee is a full-time employee. If an employee is actually employed on average at least 30 hours per week during the standard measurement period, then the employee must be considered a full-time employee during the following “stability period” (regardless of the number of hours of service of the employee during the stability period, provided he or she remains employed). Conversely, an employee who was not actually employed on average at least 30 hours per week during the standard measurement period need not be considered a full-time employee during the following stability period (even if the employee works more than 30 hours per week during the stability period).
Each affected employer must select a standard measurement period of at least three months but not more than 12 months. For an employee who was a full-time employee during the standard measurement period, the following stability period must be a least six months long and may not be shorter than the standard measurement period. For an employee who was not a full-time employee during the standard measurement period, the stability period may not be longer than the standard measurement period.
In addition to the standard measurement period and the stability periods, an affected employer may designate an “administrative period” of up to 90 days between the end of the standard measurement period and the beginning of the next stability period. An employer may use the administrative period to determine full-time status, and notify and enroll eligible full-time employees. The administrative period may not lengthen or shorten the measurement or stability periods, nor create gaps in coverage.
The standard measurement period and stability period generally must be the same for all employees. However, an employer may use different periods for members of different bargaining units, collectively bargained and non-collectively bargained employees, salaried and hourly employees, and employees whose primary places of employment are in different states. Also, different members of the same controlled group may have different standard measurement, stability, and administrative periods.
As a practical matter, the stability period for many employers will likely be the plan year for the employer’s group health plan. Assuming a January 1 – December 31 plan year, an example of viable standard measurement, administrative, and stability periods would be as follows:
Standard Measurement Period - November 1 to October 31;
Administrative Period - November 1 to December 31; and
Stability Period - January 1 to December 31.
Applying these hypothetical periods to the 2014 plan year and to a hypothetical employee who has been continuously employed since 2011, the employer would determine the employee’s full-time status based on the employee’s average hours per week from November 1, 2012 to October 31, 2013. That determination would be made and, if applicable, health plan coverage would be offered, during the administrative period from November 1, 2013 to December 31, 2013 (which period likely would include the employer’s usual open enrollment period). The employee’s status - full-time or not full-time - would then be fixed for all of the 2014 plan year, regardless of the employee’s actual hours in 2014.
Special Rules for New Hires
The general rules summarized above apply to an employer’s on-going employees, who are those employees who have been employed for at least one standard measurement period. The proposed regulations provide special rules for determining whether and when a new employee (i.e., those employed for less than one complete standard measurement period) will be considered full-time for purposes of the employer mandate.
If, at the time of hire, a new employee is reasonably expected to be employed for 30 hours per week or more, the new employee must be considered full-time during the then current stability period. To avoid exposure to mandate-related penalties, such a new full-time employee must be offered affordable health plan coverage at or before the conclusion of the initial three calendar months of employment.
For new employees who are not reasonably expected to be employed for 30 hours per week or more (called variable hour employees), the employer must establish an “initial measurement period,” which begins on an individual employee’s date of hire and lasts at least three months, but not more than 12 months. Because new variable hour employees are likely to be hired on many different dates during a year, an employer will have to track many different initial measurement periods - each new employee will have his or her own initial measurement period.
If a new variable hour employee works on average at least 30 hours of service per week during his or her initial measurement period, then the employer must treat the employee as a full-time employee during the stability period that begins after the employee’s initial measurement period (and any associated administrative period). The first stability period for a new variable hour employee (which period will often be independent of the stability period that applies to on-going employees) must be a period of at least six calendar months and must be no shorter in duration than the initial measurement period. If a new variable hour employee does not work on average at least 30 hours per week during his or her initial measurement period, then the employer is permitted to treat the employee as not a full-time employee during the stability period that follows the initial measurement period. The stability period for such an employee must not be more than one month longer than the initial measurement period and must not exceed the remainder of the standard measurement period (plus any associated administrative period) in which the initial measurement period ends. (Initial and standard measurement periods may overlap, requiring the measurement of an employee’s service during both measurement periods.)
A rehired employee is treated as a new employee (and the initial measurement and stability period rules summarized above will apply), if either the period during which the employee is credited with no hours of service is at least 26 consecutive weeks, or the period with no credited hours of service (of less than 26 weeks) is at least four weeks long and is longer than the employee’s period of employment immediately preceding the period with no credited hours of service. A rehired employee who is not treated as a new employee must be treated as an ongoing employee and the measurement and stability period that would have applied to the employee had the employee not experienced a break in service would continue to apply upon the employee’s resumption of service. For such an employee, special employment break period rules may apply and require the employer to disregard the break, or impute hours for the break, when the employer determines the employee’s average hours for the measurement period.
Hours of Service
“Hours of Service” for purposes of these calculations include both hours paid for service, and all hours for paid-time off, consistent with the existing rules of the U.S. Department of Labor (at 29 CFR 2530.200b-2(a)) that generally apply to retirement plan eligibility and vesting determinations. For an employee who is paid on an hourly basis, each hour for which the employee is paid, or entitled to payment, must be counted. For an employee who is not paid on an hourly basis, an employer must calculate hours of service under one of the following methods: (a) counting actual hours based on records of hours worked and paid-time off hours, (b) using a days-worked equivalency under which the employee is credited with eight hours of service for any day the employee has at least one hour of service, or (c) using a weeks-worked equivalency under which the employee is credited with 40 hours of service per week for each week during which the employee is credited with at least one hour of service. Different methods may be used for different classes of non-hourly employees. The selected equivalency, however, must generally reflect the hours actually worked and the hours for which payment is made or due and may not substantially understate an employee’s hours, such as using the days-worked equivalency for any employee who works three 10-hour days per week.
In the preamble to the proposed regulations, the Internal Revenue Service recognizes that the hour of service rules apply imperfectly to employees whose compensation is not based primarily on hours worked (such as commission-based salespersons and adjunct faculty), or to employees whose hours are limited for safety purposes (such as certain transportation employees). Until further guidance is issued, employers of such employees (including educational organizations) must use a reasonable method for crediting hours of service to those employees (and others in similar positions). The selected method must be consistent with the purposes of the employer mandate. A method of crediting hours would not be reasonable if it took into account only some of an employee’s hours of service with the effect of re-characterizing, as non-full-time, an employee in a position that traditionally involves more than 30 hours of service per week. For example, it would not be a reasonable method of crediting hours in the case of an adjunct faculty member to take into account only classroom or other instruction time and not other hours that are necessary to perform the employee’s duties, such as class preparation time.
Because the employer mandate provisions of the ACA apply only to applicable large employers, every employer must first determine whether that status applies. For some employers, that will be an easy determination, either because the employer always employs far more than 50 full-time employees (in which case the employer is subject to the mandate as an applicable large employer) or the employer never employs more than a few employees during any year (in which case the employer mandate will not apply). For employers that are not certain about whether the average of its full-time employees and FTEs will equal or exceed 50 for any year, determining applicable large employer status is critically important. Those employers should be taking steps now to make preliminary determinations and take appropriate steps to avoid (or plan for) such status. Staffing during the remainder of 2013 can make a significant difference in determining whether the employer will be an applicable large employer when the employer mandate becomes effective in 2014. Staffing in 2013 will also be important for applicable large employers because (depending on the measurement periods selected) employee hours during 2013 will determine which employees must be offered affordable health plan coverage in 2014.
The concepts and calculations for determining applicable large employer status and full-time employee status are complex. This is a summary of some of the basic rules on these topics. Additional rules (not summarized here) apply for purposes of determining whether health plan coverage is affordable, whether the offered coverage provides minimum value, and the extent to which non-compliance with the employer mandate will result in a penalty being imposed on the employer. The Internal Revenue Service also is likely to issue further guidance that will address such topics as short-term employees, temporary staffing agencies, and high-turnover employment situations.
Stay tuned for further developments. However, it is definitely not too early to start to analyze the extent to which the ACA’s employer mandate will apply beginning in 2014.