For purposes of complying with the Affordable Care Act’s employer shared responsibility rules (which are codified in Internal Revenue Code § 4980H), employers must identify their “full-time employees.” Final regulations issued under Code § 4980H provide two principle testing methods for making this call: the “monthly measurement method” and the “look-back measurement method.” (The final regulations are available here. See here for a useful IRS summary). In recently-issued Notice 2014-49, the Internal Revenue Service offers proposed approaches that employers may use when addressing changes in and among measurement methods, including:
- A change in the look-back measurement method (e.g., where an employee transfers within an employer from a position for which one measurement period applies to a position for which a different measurement period applies); or
- Where the measurement period applicable to an employee changes (e.g., an employer changes the measurement method applicable to employees within a permissible category).
The Code § 4980H final regulations prescribe categories of employees within which an employer may apply a particular measurement period. The categories are (i) collectively bargained employees and non-collectively bargained employees, (ii) each group of collectively bargained employees covered by a separate bargaining agreement, (iii) salaried employees and hourly employees, and (iv) employees whose primary places of employment are in different states. With respect to each of the enumerated categories, an employer may use measurement and stability periods that differ either in length or in their starting and ending dates, or it may apply either the look-back measurement method or the monthly measurement method. But employers are not free, for example, to use the look-back measurement method for employees with variable work schedules and the monthly measurement method for employees with more predictable work schedules.
The final regulations include extensive and complex rules that apply to an employee who experiences a change in employment status from a position for which the look-back measurement method is used to a position for which the monthly measurement method is used (or vice versa). These rules generally require that an employee transferring from a position for which the employer is using the look-back measurement method to a position for which the employer is using the monthly measurement method (and who at the date of transfer is in a stability period during which the employee is treated as a full-time employee) must continue to be treated as a full-time employee during the remainder of the stability period. If the employee is in a stability period for which the employee is not treated as a full-time employee, the employer may continue to treat the employee as not a full-time employee during the remainder of the stability period. The rule extends to the stability period that immediately follows the stability period during which the employee transferred. The intent is to protect the transferring employee by giving him or her the better of the two methods during the handoff to the new measurement method. But the final regulations do not address whether, or under what conditions, an employer that uses a measurement method for a category of employees may subsequently change that measurement method. Instead, the preamble to the final regulations states, 79 Fed. Reg. 8563 (Feb. 12, 2014):
“The Treasury Department and the IRS anticipate that the rules with respect to a transfer from a position to which one look-back measurement method applies to a position to which another look-back measurement method applies will require complex rules because the methods may differ not only in the length of the applicable measurement and stability periods, but also the starting dates of the measurement periods. . . . To provide for these rules in the most comprehensible format, as well as to ensure flexibility to address situations that arise that have not currently been contemplated, the final regulations provide that with respect to the determination of full-time employee status, the Commissioner may prescribe additional guidance of general applicability, published in the Internal Revenue Bulletin.”
Notice 2014-49 makes good on that promise.
Employee transferring from a position for which one measurement period applies to a position for which a different measurement period applies
This first of the two situations addressed in the notice involves instances in which an employee, who has been employed in one position (the “first position”) for which the employer uses the look-back measurement method, transfers to another position (the “second position”) for which the employer also uses the look-back measurement method, but with a measurement period that is different from the measurement period applicable to the first position. Under this proposed approach, following a transfer, an employer includes hours of service earned in the first position either by counting the hours of service using the counting method applied to the employee in the first position, or recalculating the hours of service earned in the first position using the hours of service counting method applied to the employee in the second position. The employer must in each case treat all similarly situated employees consistently.
The approach envisioned by the notice varies depending on whether the transferring employee is in a measurement, stability, or administrative period. (The notice reminds us that an initial measurement period does not apply to new employees who are full-time employees, and so are not variable-hour, seasonal, or part-time employees.)
(i) Employees in a stability period or an administrative period
If an employee is in a stability period or an administrative period applicable to the first position as of the date of transfer, the employee’s status as a full-time or non-full-time employee for the first position remains in effect until the end of that stability period. At the end of the stability period, the employee assumes the full-time employee or non-full-time employee status that the employee would have under the look-back measurement method applicable to the second position, but including hours of service in the first position when applying that measurement method.
Example: Position 1 and Position 2 are two positions at the same applicable large employer. For Position 1, the employer uses 12-month standard measurement and stability periods beginning January 1. For Position 2, the employer uses 12-month standard measurement and stability periods beginning July 1. There are no administrative periods.
Employee A is an ongoing employee in Position 1 who during the 2015 standard measurement period averages less than 30 hours of service per week (so she is not offered coverage during the 2016 stability period). Employee A does, however, average 30 or more hours of service per week during the period from July 1, 2015 through June 30, 2016. On August 15, 2016, Employee A transfers to Position 2. For the period from August 15, 2016 through December 31, 2016 (the end of the stability period for Position 1 during which the transfer occurs), Employee A retains her status as a non-full-time employee.
As of January 1, 2017, Employee A’s status is determined under the look-back measurement method applicable to Position 2. Employee A is a full-time employee starting January 1, 2017, because Employee A averaged 30 or more hours of service per week in the measurement period for Position 2 beginning July 1, 2015 and ending June 30, 2016 (which has a stability period of July 1, 2016 through June 30, 2017). After June 30, 2017, Employee A’s status continues to be determined using the applicable measurement period for Position 2.
In sum, the rule requires an employer to run out the employee’s status as full-time (or not) for the current Position 1 stability period, then shift to the Position 2 measurement and stability period taking into account all Position 1 hours of service.
(ii) If an employee is not in a stability period or in an administrative period immediately following the end of the initial measurement period, the employee’s status as a full-time or non-full-time employee is determined solely under the look-back measurement method applicable to the second position as of the date of transfer, including all hours of service in the first position.
Example: For Position 1, the employer uses 12-month standard measurement and stability periods beginning January 1 and a 12-month initial measurement period beginning on each employee’s start date. For Position 2, the employer uses 6-month standard measurement and stability periods beginning January 1 and July 1 and a 6-month initial measurement period beginning on an employee’s start date. The employer hires Employee B into Position 1 as a new variable-hour employee on January 1, 2015. Employee B averages 30 or more hours of service per week during the period from January 1 through June 30, 2015. On October 1, 2015, at which time Employee B is in the initial measurement period for Position 1, Employee B transfers from Position 1 to Position 2.
At the date of the transfer, Employee B is not in a stability period for Position 1 because Employee B has not been employed for a full initial measurement period or a full standard measurement period. Accordingly, Employee B’s status is determined under the measurement method applicable to Position 2 as of the date of transfer, taking into account Employee B’s hours of service in Position 1.
Employer-initiated changes in measurement methods for one or more permissible categories of employees
The second of the two situations addressed in the notice involves instances in which an employer changes the measurement method applicable to a permissible category of employees. A change in measurement method may include a change from the look-back measurement method to the monthly measurement method (or vice versa), or a change in the duration or start date of any applicable measurement period under the look-back measurement method.
Generally, the status of any employee whose applicable measurement period under the look-back measurement method is changed by the employer is determined as if the employee had transferred from a position for which the original measurement method applies to a position for which the revised measurement method applies as of the effective date of the change, applying existing rules (described above) that govern changes in employment status from a position for which the look-back measurement method is used to a position for which the monthly measurement method is used or vice versa.
The notice provides an example in which an employer determines the full-time employee status of employees covered by a particular collective bargaining agreement (CBA) using 6-month measurement and stability periods, each starting April 1 and October 1, and determines the status of employees not covered by the CBA using 12-month measurement and stability periods, each starting January 1. On April 1, 2017, the employer changes the look-back measurement method for employees not covered by the CBA to be the same as that used for employees covered by the CBA. The example continues:
For a transition period following the date of this change, the status of employees not covered by the CBA must be made in a manner consistent with this notice, treating each employee who is subject to the measurement method applicable to employees not covered by the CBA as if on April 1, 2017, that employee had transferred from a position subject to the original measurement method to a position subject to the revised measurement method. Accordingly, each employee subject to the measurement method applicable to employees not covered by the CBA who is in a stability period as of April 1, 2017 retains his or her status as a full-time employee or non-full-time employee, as determined under the original measurement method for the remainder of the 12-month stability period applicable to that employee. Each such employee who is not in a stability period as of April 1, 2017 has his or her status determined as of April 1, 2017 in accordance with the 6-month measurement method.
Impact on mergers and acquisitions
The notice invites comments on “the potential application of the proposed approach described in this notice, or similar rules, in the context of a corporate transaction such as a merger or acquisition involving employers using different measurement methods.” According to the notice, entities involved in corporate transactions may (and likely will) “have different measurement methods for their respective employees in a particular category.” Until further guidance is issued (and at least through the end of calendar year 2016), the notice allows a party to a corporate transaction in which employers use different measurement methods “to rely on the approach described in the notice.”
In addition, the notice provides transition relief under which a party to the transaction “will not be treated as applying an impermissible categorization of employees” merely because it continues to apply the measurement method in effect immediately before the corporate transaction. The transition period starts on the date of the transaction and ends on the last day of the first stability period following a standard measurement period that would have applied to the new employees and that begins after the date of the transaction (or, in the case of an employer that uses the monthly measurement method with respect to a category of employees, the last day of the first calendar year that begins after the date of the transaction).