New guidance for employers on two key provisions under the Patient Protection and Affordable Care Act that take effect in 2014 has been released. The first, a coordinated release from the Internal Revenue Service, Department of Labor and Department of Health and Human Services, provides temporary guidance on the 90-day waiting period limitation applicable to variable hour employees. The second, IRS Notice 2012-58, describes safe harbor methods employers may (but are not required) to use to determine which employees must be treated as full-time employees for purposes of the shared employer responsibility provisions (“pay-or-play”) of Internal Revenue Code Section 4980H.
90-Day Waiting Period Limitation –PHSA Section 2708
For plan years beginning on or after January 1, 2014, a group health plan cannot impose a waiting period of more than 90 days. This provision, which is referred to as Public Health Service Act (PHSA) Section 2708, does not require an employer to offer health coverage to any particular employee or class of employees, including part-time employees, but prevents an otherwise eligible employee from having to wait more than 90 days before coverage becomes effective.
Expanding on previously issued guidance, the coordinated release defines “waiting period” as the period of time that must pass before coverage for an employee or dependent, who has met the plan’s eligibility requirements, can become effective. The release confirms that a group health plan may impose conditions on eligibility, such as being in an eligible job classification or being employed at a specific facility, as long as the condition is not designed to avoid the 90-day waiting period limitation. Furthermore, the release clarifies that where an employee may elect coverage that would begin on a date that does not exceed the 90-day waiting period limitation, the 90-day waiting period limitation is considered satisfied, even if the employee does not make an election until after the end of the 90-day period.
If a group health plan conditions eligibility on an employee being full-time or working a specified number of hours in a given period, the release provides that the plan may take a reasonable period of time to determine whether a newly hired employee with a variable work schedule meets the plan’s eligibility conditions. This period may include a measurement period that is consistent with the initial measurement period permitted for determining full-time employees under Code Section 4980H, discussed below, even if the employer is not an applicable large employer for purposes of Code Section 4980H. Except where a waiting period exceeding 90 days is imposed after a measurement period, an employer that uses a measurement period for variable hour employees will not have violated the 90-day waiting period limitation if coverage for those variable hour employees who meet the plan’s eligibility conditions is made effective no later than 13 months from the employee’s start date, plus, if the employee’s start date is not the first day of a calendar months, the time remaining until the first day of the next calendar month.
Employer Shared Responsibility – Code Section 4980H
Beginning in 2014, employers with 50 or more full-time employees, including full-time equivalents, during the preceding calendar year (“applicable large employers”) will be subject to an assessable payment if any full-time employee enrolls in health insurance through a State Exchange and receives a premium tax credit or cost-sharing reduction because the employer does not offer minimum essential coverage to its full-time employees or the health coverage offered by the employer either does not provide minimum value (i.e., does not cover at least 60% of the cost of plan benefits) or is unaffordable by the employee (i.e., the premium required to be paid by the employee exceeds 9.5% of the employee’s household income.) The employer’s failure to provide a full-time employee with the opportunity to enroll in minimum essential coverage could trigger an assessable payment of $2,000 per year ($166.67 per month) per full-time employee; if the coverage is unaffordable or does not meet the minimum value requirements, the assessable payment is equal to $3,000 per year ($250 per month) for each full-time employee who qualifies for and receive a premium tax credit or cost-sharing reduction from a State Exchange.
Determining whether an employer qualifies as an “applicable large employer” depends on the number of full-time equivalent employees, which includes full- and part-time employees, whereas the assessable payments are determined on the basis of full-time employees only. The Affordable Care Act defines a “full-time employee” with respect to any month as an employee who is employed on average at least 30 hours per week or 130 hours per month.
Determining Full-Time Status – IRS Notice 2012-58
Building on previous guidance, Notice 2012-58 adopts the look-back/stability period safe harbor method, originally proposed in Notice 2011-36, for determining whether an ongoing employee is a full-time employee and modifies the look-back/stability period safe harbor originally proposed in Notice 2012-17 for newly hired variable and seasonal employees.
Ongoing Employees: Look-Back/Stability Period Safe Harbor
Under this safe harbor method, an employer would determine each ongoing employee’s full-time status by looking back at a period of three to 12 consecutive months (the standard measurement period). An “ongoing employee” is an employee who has been employed by the employer for at least one consecutive standard measurement period. If the employer determines an employee averaged at least 30 hours per week (or at least 130 hours per month) during the standard measurement period, the employer must treat the employee as a full-time employee during the subsequent “stability period” regardless of the number of hours worked by that employee. If the employee did not work full-time during the standard measurement period, the employer would not need to treat the employee as a full-time employee during the stability period that follows, but is not longer than, the standard measurement period. The stability period is a period of at least six consecutive months that is not shorter in duration than the standard measurement period and that begins after the standard measurement period. According to the Notice, the employer may choose different standard measurement periods for employees in different specified categories, but the measurement period must be applied on a uniform and consistent basis for all employees in the same category. Categories include:
- Collectively bargained and non-collectively bargained employees;
- Salaried and hourly employees;
- Employees of different entities; and
- Employees located in different states.
Ongoing Employees: Option to Use Administrative Period
Because employers may need time between the standard measurement period and the stability period to determine which ongoing employees are eligible for coverage and to notify and enroll the employees, the Notice allows employers to implement a 90-day “administrative period” following the standard measurement period but before the subsequent stability period begins. The administrative period cannot reduce nor lengthen the standard measurement or stability period.
For example, an employer chooses to use a 12-month stability period that begins on January 1 and a 12-month standard measurement period that begins on October 15. The period between the end of the standard measurement period (October 14) and the beginning of the stability period (January 1) is the administrative period. During this administrative period, the employer determines which employees worked full-time during the measurement period, notifies them of their eligibility for the plan for the calendar year beginning on January 1 and of the coverage available under the plan, and enrolls the employees who elect coverage in the plan.
Newly Hired Employees – Reasonably Expected to Work Full-Time
If an employees is reasonably expected at his or her start date to work full-time, the Notice makes clear that no penalty under Code Section 4980H will be assessed on the employer during the first three calendar months of employment as long as the employee is offered coverage at or before the expiration of that three month period.
Safe Harbor for Newly Hired Variable Hour Employees and Seasonal Employees
Notice 2012-58 provides a safe harbor for determining whether newly hired variable hour and seasonal employees are to be treated as full-time employees, using an “initial measurement period” and associated stability period. The initial measurement period, as selected by the employer, must be between three and 12 months, and may begin on the employee’s start date or the first day of the next month. The employer measures the number of hours completed by the new employee during the initial measurement period and determines whether the employee completed an average of 30 hours per week. If the newly hired employee is determined to be a full-time employee during the initial measurement period, the employer must treat the employee as a full-time employee during the subsequent stability period, which must be the same length as the stability period for ongoing employees. If the newly hired employee is determined not to be a full-time employee during the initial measurement period, the employer may treat the employee as not a full-time employee during the stability period that follows the initial measurement period. In this case, the stability period must not be more than one month longer than the initial measurement period and must not exceed the remainder of the standard measurement period (plus any associated administrative period) in which the initial measurement period ends.
Similar to the safe harbor for ongoing employees, the employer has the option of using a 90-day administrative period to determine which new employees are eligible for coverage and to notify and enroll these employees. However, this 90-day period must include all periods between the employee’s start date and the date the employee is first offered coverage under the group health plan. Further, the combined length of the initial measurement period and the administrative period cannot extend beyond the last day of the first calendar month beginning on or after the first anniversary of the employee’s start date. For example, if an employer uses a 12-month initial measurement period which begins on the first day of the month following the employee’s start date, the period between the end of the initial measurement period and the offer of coverage to a new variable hour employee who works full-time during the initial measurement period must not exceed one month.
The Notice also provides guidance on the transition from the new employee rules to the ongoing employee rules and provides many examples on how to apply these rules to ongoing employees and newly hired variable hour and seasonal employees.
Definition of Variable Hour Employee and Seasonal Employee
A new employee is a variable hour employee if (a) based on the facts and circumstances at the start date, it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week, or (b) the employee is initially expected to work at least 30 hours per week, but the period of employment at more than 30 hours per week is reasonably expected to be of limited duration and it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week over the initial measurement period. For example, a variable hour employee would include a retail worked hired at more than 30 hours per week for the holiday season who is reasonably expected to continue working after the holiday season but is not reasonably expected to work at least 30 hours per week for the portion of the measurement period remaining after the holiday period.
Although the Affordable Care Act defines a seasonal employee for purposes of defining an applicable large employee but not for determining full-time status, Notice 2012-58 provides, at least through 2014, employers may use a reasonable good faith interpretation of the term seasonal employee.
Employers may rely on Notice 2012-58 and the coordinated release relating to the 90-day waiting period through the end of 2014. Although Code Section 4980H does not become effective until January 1, 2014, employers that wish to take advantage of the safe harbors for determining full-time status will need to select measurement periods that begin before 2014.