Over a year after thePatient Protection and Affordable Care Act (“PPACA”) was signed into law, the Internal Revenue Service (“IRS”) recently released much anticipated information on issues related to the calculations of full-time and full-time equivalent employees for determining when an employer may be subject to a penalty under PPACA. In Notice 2011-36 (“Notice”), the IRS is specifically seeking employer’s comments on several of the issues by June 17, 2011. For hospitality employers, who traditionally employ a large number of part-time, temporary, and seasonal workers, the Notice provides an excellent opportunity for employers to comment and potentially alter PPACA’s financial impact in 2014.
Under PPACA, an employer, with 50 or more full-time employees (who work at least 30 hours per week), must pay a penalty if any full-time employee receives an applicable premium tax credit or cost-sharing reduction to purchase coverage through a State Exchange and, either the employer fails to offer full-time employees the opportunity to enroll in “Minimum Essential Coverage” or the employer offers its full-time employees the opportunity to enroll but the coverage is either “unaffordable” or does not provide minimum value.
Definition of “Hours of Service”
Under PPACA, an employee who has an average of at least 30 hours of service per week is considered a full-time employee. Significantly, the Notice proposes that future regulations would provide that 130 hours of service in a calendar month would be treated as the monthly equivalent of at least 30 hours of service a week. Accordingly, the proposed standard of 130 hours of service per calendar month would take into account that an average month consists of more than four weeks.
Further, the IRS proposes that an employee’s hours of service would include: a) each hour for which the employee is paid, or entitled to payment, for the performance of duties for the employer; and b) each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, or military duty or leave of absence.
How “Hours of Service” Would be Calculated
- Calculation of “Hours of Service” for Hourly Employees
“For employees paid on an hourly basis, the employer would be required to calculate actual hours of service from records of hours worked and hours for which payment is made or due.” For example, payment is made or due for vacation, holiday, illness, incapacity, etc.
- Calculation of Hours of Service for Non-Hourly Employees
For employees not paid on an hourly basis the Notice articulates three methods by which an employer can calculate “hours of service.” First, the Notice permits an employer to count actual hours of service from records of hours worked and hours for which payment is made or due for vacation, holiday, illness, incapacity, etc. Additionally, the Notice would permit employers to calculate “hours of service” by using a days-worked equivalency method whereby the employee is credited with eight hours of service for each day for which the employee would be required to be credited with at least one hour of service. Further, the Notice allows employers to use a weeks-worked equivalency of 40 hours of service per week for each week for which the employee would be required to be credited with at least one hour of service.
Calculating the Number of Full-time Equivalent Employees for “Applicable Large Employer” Determination
The Notice proposes to calculate the number of full-time equivalent employees by following through the following steps: 1) Calculating the aggregate number of hours of service for all employees who were not full-time employees for that month; 2) Divide the total hours of service (as calculated in step 1) by 120. The resulting number constitutes the number of full-time equivalent employees for a given calendar month.
Calculating the Number of Full-Time Employees to Constitute “Applicable Large Employer
“The steps in calculating the number of full-time employees in the preceding calendar year, and thus whether the employer is an applicable large employer for the calendar year, would be as follows:”
- Calculate the number of full-time employees (including seasonal employees for each calendar month in the preceding year.
- Calculate the number of full-time equivalent employees (including seasonal employees) for each calendar month in the preceding year
- Add the number of full-time employees and full-time equivalent employees for each of the 12 months in the preceding calendar year
- Add the 12 monthly numbers and divide the sum by 12. The resulting number is the average number of full-time for the preceding calendar year.
If the number resulting from the above calculation is less than 50, the employer is not an applicable large employer for the current calendar year. However, if the number resulting from the above calculation is greater than 50 an employer must determine whether the “seasonal worker exception” applies. If the seasonal worker exception applies then the employer is not an applicable large employer, alternatively if the seasonal worker exception does not apply then the employer is an applicable large employer within the meaning of the Free Rider provision.
Seasonal employees are employees who perform labor and services of a seasonal basis. If an employer’s workforce exceeds 50 full-time for 120 days or fewer during a calendar year, and the employees in excess of the 50 who were employed during that period of no more than 120 days were seasonal employees, the employer would not be an applicable large employer.
Potential Methods for Determining Full-Time Employees
Of critical importance to determining potential employer liability under PPACA is the determination of which employees are full-time in any given month. The Notice recognizes that the requiring the full-time determination to be made on a monthly basis would cause significant difficulties for both the employer and employee. Thus, the Notice proposes an alternative determination methodology that may provide more stability and specifically requests comment.
The alternative proposed by the Notice would permit applicable large employers, at their option, to use a “look-back/stability period safe harbor.” Under the possible look-back/ stability safe harbor method, an employer would determine each employee’s full-time status by looking back at a defined period of not less than three but not more than twelve consecutive calendar months, to determine whether the employee averaged at least 30 hours of service per week during the measurement period. If the employee were determined to be a full-time employee during the measurement period, then the employee would be treated as a full-time employee during the subsequent stability period, regardless of the employee’s actual service hours.
Under this approach, if an employee was determined to be a full-time employee during the measurement period, the stability period would be required to last at least 6 consecutive months that following the measurement period, and in no case for a period of time shorter in duration than the measurement period. If the employee was determined not to be a full-time employee during the measurement period, the employer would be permitted to treat the employee as a part-time employee during a stability period that consecutively followed the measurement period, but the stability period could not exceed the measurement period.
For new employees who might not have been employed by the employer during the entire measurement period, or employees who move into full-time status during the year, it is currently anticipated that the safe harbor will apply only in a limited form.
Impact for Employers
The Notice is significant for employers who employ large numbers of part-time, temporary and seasonal works for several reasons. First, the Notice represents the first chance employers will have to comment of the Free Rider Provision and the associated 30 hour threshold for full-time employee designation. Additionally, the Notice contains several rules which represent a departure from a strict reading of the statute which will assist employers with compliance. Significantly, the look-back/stability safe harbor and the IRS’s understanding that an average month contains more than 4 weeks for purposes of determining “hours of service” represent an intent to make these rules more “user-friendly” for employers.
Hospitality employers should be reviewing the Notice and evaluating how its methodology could impact its workforce, particular with respect to calculating full time employees to determine compliance with PPACA.