The proposed rules for implementation of the Employer Mandate (aka “Shared Responsibility for Employers Regarding Health Coverage” or “Play or Pay“) provided an optional Look-Back Method for identifying which employees are full-time and must be offered health care coverage to avoid excise taxes under Code Section 4980H, but they didn’t identify any alternatives to the Look-Back Method. The final regulations provide the Monthly Measurement Method as an alternative to the Look-Back Method. If you choose not to use the Look-Back Method, you by default have selected the Monthly Measurement Method.
The Monthly Measurement Method is aptly named: an employer identifies full-time employees based on the hours of service for each calendar month. There is no use of stability periods as with the Look-Back Method – generally, for any given month, an employee is or is not full-time and entitled to an offer of coverage.
There are some nuances, however. An employer will not be subject to excise taxes with respect to an employee because the employer does not offer him coverage until the first day of the fourth calendar month after he otherwise becomes eligible. This is helpful if you have a part-time employee who starts to pick up additional hours and becomes full-time – it is essentially a “first three months free” rule. (Keep in mind, the employer must still comply with the separate 90-day maximum waiting period rule, which could require coverage to be effective sooner.)
The rules are clear that this relief can only be used once per period of employment of an employee. As a result, to the extent an employee moves between full- and part-time, the employer could be exposed to penalties. Take the following example: Acme Corp. uses the Monthly Measurement Method. Employee Beth is a full-time employees covered under Acme’s group health plan. When she first started, she became covered under the Acme plan on the first day of the fourth month after she started. On June 1, Beth requests fewer hours and Acme schedules her for 25 hours per week beginning July 1. Acme feels certain that Beth will not have more than 130 hours of service in July, so it terminates her coverage effective July 1. Beth has 115 hours of service in July, 110 in August, and 120 in September. In October, Beth obtains health coverage on the government exchange (aka the Marketplace) and obtains a cost-sharing subsidy. She also works 130 hours in October. Acme offers her coverage effective November 1 in recognition of her full-time status in October. However, Acme’s failure to offer Beth coverage for the month of October can subject Acme to the excise taxes for that month.
The example illustrates the underlying issue with the Monthly Measurement Method. Excise taxes may be assessed for any calendar month during which a full-time employee was not eligible to receive affordable, minimum value coverage for each day of that calendar month. However, an employer may not know whether the employee is full-time until the end of that same calendar month.
Employers can use both the Monthly Measurement Method and the Look-Back Method, but only with respect to certain categories of employees. The regulations do not permit an employer to adopt the Look-Back Method for variable hour and seasonal employees while using the Monthly Measurement Method for employees with more predictable hours of service. However, the different methods can be used for hourly vs. salaried employees, collectively bargained vs. non-collectively bargained employees, and employees who work in different States, and a different method can be applied to each group of collectively bargained employees. There are specific, detailed rules about how to handle an employee’s transition from a position for which the Monthly Measurement Method is used to a position for which the Look-Back Method is used, and vice versa.
At least for an employer with a workforce whose hours tend to fluctuate, use of the Monthly Measurement Method would seem to be impractical to administer, and an employer that chooses to insure its health plan might encounter resistance from its insurance issuer to adding and removing existing employees to and from coverage throughout the year. The employer would also be in the position of sending a lot of COBRA election notices.