Under the federal Affordable Care Act ("ACA"), a "large employer" may have to pay severe penalties to the IRS if it does not offer affordable health coverage (insured or self-insured) to its full-time employees and their dependents in 2014. The Q&A below is provided as a helpful reference to assist you through the process.

Start Counting Full-Time Employees Now

An employer group should start counting employees soon, so it can see within six months whether it is a large employer. Then it will have time to evaluate future staffing and the potential costs of health coverage or ACA penalties in 2014.

Q: Are you a "large employer?"

For this purpose, all members of a group of employers under common ownership (or in an affiliated service group) are treated as one employer (an "employer group"). A "large employer" for 2014 is defined as an employer group that employed an average of 50 or more full-time employees (including full-time equivalent employees), on business days during a measuring period of at least six consecutive months in 2013. The group may choose the length of this 2013 measuring period, but after 2013 each measuring period must be 12 months. "Full-time employees" and "full-time equivalent employees" are defined below.

  • Who is a full-time employee? An employee is a "full-time employee" for a month if employed by the employer group, on average, at least 30 hours of service weekly during the month. As an alternative for the large employer test, 130 hours of service in a month may be treated as 30 hours weekly. An employer group must count all employees required to receive a Form W-2 for work in the United States, but does not count the group's leased employees, sole proprietor, partners, or 2% shareholders of an S corporation.
  • How are full-time equivalent employees (FTEQs) counted? An FTEQ is a group of employees who are not full-time employees, and whose hours of service are combined to count as the equivalent of one full-time employee. An employer group's FTEQs for a month are figured by (1) counting the total hours of service (up to 120 hours for each employee) for all employees who were not full-time employees for the month, and (2) dividing their total hours by 120. That result is the number of FTEQs, which may include a fraction.
  • What hours are counted? "Hours of service" are those for which the employee is paid, whether working or not. Specific rules apply for (1) employees not paid on an hourly basis, (2) teachers who are not paid for preparation time or during school year breaks; and (3) unpaid hours during FMLA and USERRA leaves and time off for jury duty.
  • How does an employer group figure whether it has 50 full-time employees? Combine the monthly full-time employee and FTEQ totals for each month in the 2013 measuring period (which may be as short as six months), and divide by the number of months in that period, to find the average number of full-time employees for the large employer test.
  • Can seasonal employees be excluded? A specific rule allows an employer group to exclude some seasonal employees from the 2013 measuring period, if needed to avoid being a large employer.

Q: Who must be offered affordable health coverage to avoid employer penalties?

To avoid penalties in 2014, a member of a large employer group must offer affordable health coverage (including at least minimum essential benefits) to at least 95% of the member's full-time employees and their dependents (other than spouses).

  • Whose full-time employees are counted for the employer penalty rules? For the penalty rules, each member of a large employer group (1) counts its own full-time employees (at least 30 hours of service weekly, on average, per month), and (2) does not count any FTEQs described above.
  • What 2013 measuring period is used to count ongoing employees? The employer may choose a 2013 measuring period between three and 12 months to determine average weekly hours that will identify its ongoing full-time employees. An "ongoing employee" is an employee who is employed throughout that measuring period.

Practical Point. For example, the 2013 measuring period could be a six-month period ending October 31, 2013. That would allow two months for the employer to review staffing levels and health coverage, plan for ACA compliance in 2014 and, if health coverage will be offered, allow enrollment for coverage in 2014. A six-month measuring period would be the most flexible.

  • Are ongoing and new employees counted in the same way? Separate rules apply for counting the hours of "ongoing employees" (described below) and "new employees." The below section answers questions about counting new employees (those hired after the start of the following 2013 measuring period).

How to Count New Employees

Q: Are the hours of new employees and ongoing employees counted in the same way? No. Separate rules apply for counting the hours of service of "new employees" and "ongoing employees" to determine if they are full-time for health coverage purposes.

  • Who is an ongoing employee for health coverage in 2014? An "ongoing employee" is one who is employed by a large employer throughout its 2013 standard measuring period (between three and 12 months long). An ongoing employee is treated as full-time for 2014 health coverage if he or she works on average at least 30 hours weekly during the 2013 standard measuring period. However, standard measuring periods do not apply to new employees.
  • Who is a new employee? A "new employee" is an employee who starts work for a large employer and: (1) never worked for the employer; (2) previously worked for the employer; but had a break in service at least 26 weeks long; or (3) previously worked less than 26 weeks for the employer, and had a break in service that was at least four weeks and was longer than the employee's last period of work for the employer. If an employee previously worked for the employer, but does not fit into category (2) or (3), the employee is treated as an ongoing employee instead of a new employee. A "break in service" is a period in which no hours of service were credited to the individual by the employer.

Q: Which new employees of a large employer should be offered health coverage in 2014? A new employee who should be offered coverage in 2014 is one who is hired after the start of the employer's 2013 standard measuring period for ongoing employees (described above), and qualifies as a full-time employee in one of the following two ways:

  1. Some new employees are treated as full-time right away. If a new employee (other than a seasonal employee described below) of a large employer is reasonably expected to work on average at least 30 hours weekly, based on facts known at his or her start date, then he or she is immediately treated as a full-time employee. In that case, he or she should be offered health coverage within three months after the start date. However, this offer need not be made until 2014.
  2. The status of a new employee whose hours are variable or seasonal may be determined during an initial measuring period. If a large employer does not know if a new employee will work on average at least 30 hours weekly, because he or she will be working variable hours, or is a seasonal employee described below, the employee's weekly hours may be counted during an initial measuring period chosen by the employer for all such new employees. The initial measuring period may begin on any date between the employee's start date and the first day of the next month, and may be any period between three and 12 months long.
  • Who are seasonal employees? "Seasonal employees" perform services on a seasonal basis, as defined by the Department of Labor, including (but not limited to) (1) retail workers employed only during holiday seasons and (2) certain agricultural workers. An agricultural worker performs work on a seasonal basis if the work is ordinarily performed only at certain seasons or periods of the year, and the work by its nature may not be carried on throughout the year. However, for counting full-time employees under ACA, seasonal employees can include other types of employees, in addition to retail and agricultural workers. This definition may change after 2014.
  • When should a new variable hour or seasonal employee be offered health coverage? If a new variable hour or seasonal employee is found to be a full-time employee of a large employer during the employer's initial measuring period (between three and 12 months long), the employee should be offered health coverage in 2014, by the first day of the month beginning on or after the anniversary of his or her start date.

Practical Point: For example, the initial measuring period for a new variable hour or seasonal employee who starts on July 15, 2013, could be a 10-month period beginning August 1, 2013, and ending May 31, 2014. If the employee is found to be a full-time employee during that period, the employer would have two months to offer health coverage to the employee and allow enrollment by August 1, 2014 (the first day of the month beginning after the anniversary of the start date).

  • If a new variable hour or seasonal employee's status changes to full-time during the initial measuring period, when should health coverage be offered in 2014? If the employment status of a new variable hour or seasonal employee changes during his or her initial measuring period, so that the employee is now expected to be a full-time employee (working at least 30 hours weekly in the future), the new employee should be offered health coverage to the employee by the first day of the fourth month after the change in status, even if the initial measuring period is not over. However, this offer need not be made until 2014. Also, this offer need not be made if the employee was offered health coverage for any reason before the fourth month.

Optional Enrollment and Coverage Periods for Ongoing Full-Time Employees of Large Employers

A large employer may find it impractical to determine which ongoing full-time employees should be offered affordable health coverage on a monthly basis during 2014. The Q&A below explains the optional "administrative period" and "stability period" that a large employer may use to offer coverage to ongoing full-time employees at intervals less frequent than monthly.

Please note: If you are unsure whether your company qualifies as a "large employer," or how to identify its ongoing and new "full-time employees" during certain measuring periods for counting hours of service in 2013, please refer to "Start Counting Full-Time Employees Now" and "How to Count New Employees" sections above.

Q: How may a large employer use an "administrative period" to offer health coverage to ongoing full-time employees for the next coverage period? Ongoing employees may be identified as full-time during an employer's "standard measuring period" before a plan year or any shorter coverage period. However, the employer will need a period of time between the end of the standard measuring period and the start of the next coverage period to see which ongoing employees are eligible for health coverage during that coverage period, to offer the coverage, and to enroll those who choose to participate. The period that an employer may use for those administrative functions is called an "administrative period."

  • What rules apply to an administrative period? An employer may choose an administrative period of up to 90 days between the end of each standard measuring period and the start of the next coverage period. After 2013, the administrative period must overlap any prior coverage period in which health coverage is available, so that employees who are covered during that coverage period will remain covered during the administrative period before the next coverage period. For example, employees covered for a year must remain covered during the administrative period that precedes the next year.

Practical Point: If an employer chooses a six-month standard measuring period ending on October 31, 2013, and its health plan year begins January 1, 2014, it should choose November and December of 2013 as its administrative period to prepare for the next plan year. The administrative period would be the same in later years when the employer changes to a 12-month standard measuring period ending each October 31, assuming the employer continues the same plan year.

Q: For what "stability period" may a large employer continue to treat an ongoing employee as having the same status determined during its standard measuring period? If an ongoing employee is found to be a full-time employee during a standard measuring period, or does not qualify as full-time during that period, the employer may continue to treat him or her as having that same status for health coverage available during a "stability period" beginning at the start of the next plan year.

  • What rules apply to a stability period? A "stability period" must be a coverage period (between six and 12 months long) that is chosen by the employer and immediately follows its standard measuring period and any administrative period used for enrollment.
  • How long should a stability period last? The employer can use two possible stability periods, based on the status of the employee during the prior measuring period. The period could vary as follows: (1) if an ongoing employee was a full-time employee during a standard measuring period, the following stability period (when coverage should be offered to the employee) must be at least six months long, but may not be shorter than the measuring period; or (2) if the employee was not a full-time employee during a standard measuring period, the following stability period (when coverage need not be available to the employee) may not be longer than the measuring period.

Practical Points: To avoid any inconsistency between those two possible stability periods, an employer should choose a stability period that is the same length as the prior standard measuring period. To simplify health plan administration, many employers will use a 12-month period for both purposes in 2014 and later years, except that the 2013 measuring period could be as short as six months. In that case, the stability period would be the plan year. If an employer's standard measuring period and stability period are both six months long, it must allow open enrollment twice during each plan year, so that ongoing full-time employees qualifying during a six-month standard measuring period may enroll for the next six-month stability period.

  • May an employer choose a 2014 stability period longer than its 2013 measuring period? If an employer chooses a 2014 stability period that is longer than six months (such as its plan year), the employer may choose a 2013 standard measuring period that is shorter than the stability period. However, the 2013 measuring period must be at least six months long and end no earlier than 90 days before the next health plan year begins (January 1, 2014 or later). If the 2013 measuring period ends before that plan year, this will allow an employer time to determine, before that plan year, whether or not its ongoing employees are full-time, and to rely on their full-time or part-time status for that plan year or any shorter stability period starting in 2014.
  • May an employer change its standard measuring period and stability period for ongoing employees? An employer may change future standard measuring periods and related stability periods, but generally may not change a stability period after the prior standard measuring period has begun.

Q: May an employer use different measuring periods, administrative periods and stability periods for different classes of employees? A member of a large employer group may choose different measuring periods, administrative periods, and stability periods only for the classes of employees within each of the following categories: (1) each group of employees covered by a collective bargaining agreement, (2) collectively bargained and non-collectively bargained employees, (3) salaried employees and hourly employees, and (4) employees whose primary places of employment are in different states. For example, different periods may be used for salaried employees and hourly employees.

Optional Enrollment and Coverage Periods for New Full-Time Employees of Large Employers

A large employer may find it impractical to determine every month which new full-time employees should be offered affordable health coverage during 2014. The Q&A below:

  • states the length of time that a large employer may delay offering coverage to a new full-time employee;
  • explains the optional administrative and stability periods that a large employer may use to either (1) avoid offering coverage every month to each new variable-hour or seasonal employee who qualifies as full-time for that month, or (2) exclude the employee for an extended period if he or she does not qualify as full-time during his or her unique initial measuring period; and
  • recommends a health plan amendment that, among many others, may be required for 2014.

Q: Are the time periods for offering health coverage the same for new full-time employees and ongoing full-time employees? No, the following separate offering periods will apply for offering health coverage to full-time employees who are identified as "new employees" or "ongoing employees":

  • New employees: Each new employee may be offered coverage within 90 days after being hired as a full-time employee. However, if it was not clear whether the employee would be full-time until the end of his or her unique "initial measuring period," the coverage may be offered during an "administrative period" starting after that measuring period and ending before that employee's unique "initial stability period" for that coverage.
  • Ongoing employees: As explained above in the section titled "Optional Enrollment and Coverage Periods for Ongoing Full-Time Employees of Large Employers," ongoing full-time employees may be offered coverage during an "administrative period" starting after an employer's "standard measuring period" and ending before the employer's next "stability period" (usually a plan year).

Q: For what period should a large employer offer health coverage to a new employee who starts as a full-time employee?

  • When should a new full-time employee first be offered health coverage? If a new employee is a full-time employee when hired, but is not a seasonal employee, he or she should be offered health coverage within 90 days after the employee's start date.

Practical Point: Group health plans that currently make employees eligible at the start of the next month after 90 days of service must be amended for the 2014 plan year, so that coverage is available within 90 days after a full-time employee begins work. For example, employees hired as full-time could be eligible at the start of the next month after 60 days of service.

  • For what stability periods should the new full-time employee's eligibility continue? After the employee's initial waiting period (up to 90 days), his or her eligibility for health coverage should continue during (1) the employer's stability period for ongoing employees' coverage in which the employee first becomes eligible, and (2) any later stability period starting before the employee transitions from "new" to "ongoing" employee status. Those "stability periods" are coverage periods (between six and 12 months long, but usually a plan year) chosen by the employer. After the employee is employed for a standard measuring period (generally the same length as the stability period), the employee's full-time status will be tested again during that measuring period, just like other ongoing employees.

Q: May a large employer use an administrative period for health coverage enrollment of a new variable-hour or seasonal employee who qualifies as full-time during his or her initial measuring period? Yes, most employers will need time between the end of the employee's initial measuring period and the beginning of the employee's initial stability period for coverage to (1) see whether the employee is eligible for health coverage, (2) offer the coverage, and (3) enroll the employee for that stability period.

  • What is a new employee's administrative period after his or her initial measuring period? An employer may choose to have an administrative period of up to 90 days between (1) the end of the initial measuring period in which a variable-hour or seasonal employee qualifies as full-time, and (2) the start of his or her initial stability period for coverage.

For example, if an employer hires a new variable-hour or seasonal employee on May 15, 2013, the employer's 10-month initial measuring period for the employee starts on that date and ends March 14, 2014, and the employer's 12-month initial stability period for coverage of the employee starts May 1, 2014, the administrative period to prepare for the employee's initial stability period would be the six-week period between March 14 and May 1 of 2014.

Q: What is the initial stability period for a new variable-hour or seasonal employee? That depends on whether the new employee is a full-time employee during his or her initial measuring period (a period between six and 12 months long beginning between his or her start date and the first day of the next month). After that, the employee's status (full-time or otherwise) will remain the same during his or her initial stability period.

  • What is the initial stability period for new variable-hour or seasonal employees who qualify as full-time during their initial measuring periods? The initial stability period for these new full-time employees must be the same length as the employer's stability period for ongoing employees (usually the plan year). The new full-time employee's initial stability period after his or her initial measuring period must be at least six months long (but not less than the initial measuring period), and must begin right after the employee's initial measuring period and any administrative period needed for enrollment.

For example, if (1) a new variable-hour or seasonal employee qualified as full-time during his or her 10-month initial measuring period ending March 14, 2014; and (2) the employer chose a six-week administrative period to enroll the employee, his or her initial stability period for coverage could be a 12-month period starting on May 1, 2014.

  • What is the initial stability period for a new variable-hour or seasonal employee who does not qualify as a full-time employee during his or her initial measuring period? In this case, the employer may treat the employee as not full-time during an initial stability period that immediately follows the employee's initial measuring period. The employee's initial stability period for exclusion from coverage cannot (1) be more than one month longer than his or her initial measuring period, nor (2) exceed the balance of the employer's standard measuring period for ongoing employees (plus any administrative period) in which the new employee's initial measuring period ends.

The extra month allows an employer to use an initial stability period of up to 12 months, plus a one-month administrative period, for exclusion from coverage. As an alternative, an employer could use a shorter initial measuring period, such as 10 months, plus a more practical administrative period of three months. In each case, the employer would still comply with the rule that the initial measuring period and administrative period combined may not extend beyond the end of the first calendar month beginning on or after the anniversary of the employee's start date.

Practical Point: However, any such maximum initial stability period will often be cut short if the employer's standard measuring period (plus any administrative period) ends before the initial stability period. An employer's standard measuring period will usually be a 12-month period ending two or three months before its plan year, and its administrative period will be that two or three-month period.

For example, if (1) a new variable-hour or seasonal employee did not qualify as full-time during his or her 10-month initial measuring period ending March 14, 2014; and (2) the employer chose an 11-month stability period and two-month administrative period for such employees, that would result in a maximum 13-month exclusion period ending April 14, 2015. However, if the employer's plan year is a calendar year, that exclusion period would instead end on December 31, 2014. That would occur because the employer's standard measuring period for ongoing employees would probably be a 12-month period ending September 30, 2014, and its administrative period in that case would be the three-month period ending December 31, 2014.

Q: When will a new variable-hour or seasonal employee's weekly hours be counted again after his or her initial measuring period? After a new variable-hour employee or seasonal employee has been employed for an entire standard measuring period used by the employer for ongoing employees, the employer will again test the employee for full-time status during that measuring period, just like other ongoing employees. An employer's standard measuring period will usually be a 12-month period ending two or three months before its plan year.