The Internal Revenue Service (IRS) recently issued Notice 2014-49 which describes a proposed approach for determining an employee’s full-time or part-time status for purposes of the employer shared responsibility rules under section 4980H of the Internal Revenue Code of 1986, as amended (Code), when: (1) the employee’s job within the controlled group of companies changes, and (2) a look-back methodology is used to determine full-time or part-time status for both the old job and the new job, but different look-back methodologies are used for the old and the new job. The approach proposed in Notice 2014-49 may also be used when an employee’s job is affected by a merger, acquisition or other corporate transaction.
An “applicable large employer” risks incurring penalties under the Patient Protection and Affordable Care Act (PPACA) if it fails to offer full-time employees (working 30 or more hours per week) qualifying health plan coverage. If an employee’s weekly hours vary, an employer may determine if the employee is full-time or part-time by measuring the employee’s hours month by month or during a chosen “look-back” period.
Under the look-back methodology, an employer picks a backward looking “measurement” period, uses a short “administrative” period to calculate the employee’s average hours during the measurement period, and then, based on the average hours worked during the measurement period, designates the employee as full-time or part-time for a prospective “stability” period. Within limits, the employer has flexibility in determining the length of the measurement, administrative and stability periods, and when they begin and end.
The final PPACA regulations under Code section 4980H issued in February 2014 address how to determine full-time or part-time status if an employee moves within the same controlled group of companies from a job category for which the monthly measurement method is used to a job category for which the look-back measurement method is used (and vice-versa). However, the final regulations do not address how the look-back methodology should be applied (1) when an employee transfers to a position within the controlled group of companies for which a different measurement period is used, (2) when the employer changes its look-back measurement methodology, or (3) if there is a change in the method applicable to an employee as a result of a corporate transaction.
The guidance proposed in Notice 2014-49 is necessary because employers have flexibility in designing the look-back methodology they will use and are permitted to make changes from time to time. For example: different employers within the same controlled group of businesses may use different methods of determining full-time and part-time status; hours can be counted in different ways (e.g., by totaling actual hours or estimating hours using various equivalencies based on weeks or months worked); and an employer, whether or not in a controlled group, may choose to apply the look-back period differently for different classes of employees (e.g., salaried vs. hourly, bargained vs. non-bargained, different bargaining units, or employees having principal work places in different states).
Notice 2014-49 proposes methods for addressing these situations and requests comments on its proposed approach.
IRS NOTICE 2014-49
If an employer uses the look-back method for determining the full-time or part-time status of any employees, the new guidance proposes how to apply the look-back methodology when:
- The employee’s position changes within the controlled group of businesses, and a different look-back methodology is used for employees in the new job category; or
- The employer elects to change its look-back methodology.
In brief, assuming the employee is not transferring to a new position where he or she is expected to work full-time (in which case the “change in employment status” may require the employee to be treated as full-time immediately):
- If, at the time of the change, the employee is currently in an administrative period or stability period (i.e., the employee has worked a complete measurement period under the old methodology, either an “initial” measurement period or a “standard” measurement period), then the employee retains his or her full-time or part-time status for the stability period that applied before the change in methodology (i.e., the methodology for the old job), and at the end of that stability period the employee’s status is determined using the new look-back methodology (i.e., the one that applies to the new job); and
- If, at the time of the change, the employee is not in an administrative or stability period (i.e., the employee has not worked for a complete measurement period under the old methodology), then the employee’s full-time or part-time status is determined using the new look-back methodology (i.e., the one that applies to the new job).
In both situations, when applying the look-back rules under a new methodology (e.g., for the new job), the employer must include in the calculation all of the hours worked by the employee (whether in the old job or new job). In addition, when calculating the hours worked in the old job (or under the old methodology), the employer may count those hours (using actual hours or equivalencies) by applying the hours counting rules that applied to the old job or the new job (or the old or new methodology), as long as all similarly situated employees are treated consistently.
ABC Co. has two divisions: “Widget” and “Services.” For on-going employees, Widget uses an October 15 - October 14 measurement period, a 2½ month administrative period, and a 12-month stability period beginning January 1; while Services uses a July 15 - July 14 measurement period, a 2½ month administrative period, and a 12-month stability period beginning September 1. Employee Sam has been working for Widget for years and has been averaging less than 30 hours per week for the period October 15, 2013 to October 14, 2014; therefore, he is part-time for calendar year 2015. However, for the period July 15, 2014 to July 14, 2015, he averages more than 30 hours per week. On August 15, 2015, Sam transfers to Services.
When Sam transfers to Services he is in Widget’s stability period as a part-time employee, and he may continue to be treated as a part-time employee for Services through the end of Widget’s stability period, December 31, 2015. As of January 1, 2016, Sam’s status is determined under Services’ July 15 - July 14 standard measurement period, during which he was full-time. Thus, Sam will be treated as a full-time employee of Services beginning January 1, 2016 through the end of the then-current stability period, August 31, 2016. Thereafter, Sam’s status will be determined using Services’ standard measurement period.
The same result would apply if Widget and Services originally were not part of the same controlled group of companies, Services purchased Widget on August 15, 2015, and Sam transferred to Services in connection with the sale.
Corporate Transactions: While acknowledging that there may be multiple means of determining the full-time or part-time status of employees acquired in a corporate transaction, Notice 2014-49 explicitly permits the business acquiring a group of employees to determine the full-time or part-time status of the acquired employees by either:
- Applying the rules described above, as if the employee had transferred to a new job for which a different look-back methodology applies; or
- Continuing to apply the methodology used for the acquired employees by the prior employer for a transition period. The transition period runs from the date of the corporate transaction through the end of the first stability period of the prior employer that begins after the corporate transaction closes, if the acquirer uses the look-back methodology. However, if the acquirer evaluates the employee’s full-time or part-time status based on hours worked each month, the transition period runs through the last day of the first calendar year that begins after the date of the transaction.
Employee Sally joins Targeted, Inc. as a new variable hour employee on January 1, 2016. The initial measurement period associated with Sally’s position lasts for 12 months, beginning on the date of hire. The standard measurement period also runs from January 1 until December 31, and the stability period runs from the next corresponding January 1 until December 31.
AcquireCo purchases Targeted, Inc. on May 1, 2016, during Sally’s initial measurement period at Targeted. As a result of the transaction, Sally’s employment transfers from Targeted, Inc. to AcquireCo on that date. AcquireCo’s group health plan uses six-month standard measurement and stability periods for Sally’s new position, beginning January 1 and July 1. AcquireCo also uses a six-month initial measurement period for new hires.
Sally’s full-time or part-time status would be determined under the following rules:
- Under the general rule of Notice 2014-49, since Sally was transferred at a time when she was not in an administrative or stability period, her status would be determined using AcquireCo’s measurement period at the time of the transaction (May 1, 2016), which runs from January 1, 2016 to July 1, 2016, and AcquireCo will need to consider all of the hours Sally worked for Targeted from January 1, 2016 to April 30, 2016, as well as all of her hours for AcquireCo from May 1, 2016 to June 30, 2016. Thereafter, her status will be determined like any other on-going employee of AcquireCo.
- Alternatively, under the special transition rule described in Notice 2014-49 for transactions, AcquireCo may continue to apply Targeted’s January 1 - December 31 measurement period for a transition period beginning on the May 1, 2016 transaction date and continuing through December 31, 2017. Thus, Sally would not be assigned full-time or part-time status until January 1, 2017, when her status would be based on the hours she worked for Targeted from January 1, 2016 to April 30, 2016, plus the hours she worked for AcquireCo from May 1, 2016 to December 31, 2016. Calendar year 2017 would be a stability period for Sally, and AcquireCo’s methodology would be used to determine her status beginning January 1, 2018.
RELIANCE AND COMMENTS
Employers may rely on Notice 2014-49 until additional guidance is issued, and in any event, at least through the end of 2016. The IRS and Treasury solicited comments on the proposed approach in the notice or other possible approaches for handling changes in connection with corporate transactions and whether additional rules are necessary to preclude employers from, e.g., transferring an employee to another category to delay or avoid classifying the employee as full-time. Comments are to be submitted to the IRS by December 29, 2014.