As many small employers rejoice over a delayed effective date, large employers should be rolling up their sleeves to adapt their evolving shared responsibility compliance strategies for 2015 to a new final rule from the U.S. Department of Treasury and Internal Revenue Service (IRS). 

Among the key elements of the final rule on shared responsibility (commonly known as the “pay or play” or “employer mandate” provisions) are the following:

  • For 2015 only, employers will be able to avoid the larger shared responsibility penalty by offering minimum essential coverage to at least 70%—rather than 95%—of their full-time employees.
  • “Seasonal employees”—one of the key categories for applying the look-back measurement method to assess full-time status—is now clearly limited to employees in positions for which the customary annual employment is six months or less.
  • The term “variable hour employees”—another of the key groups for applying the look-back measurement method—is clarified by adding a list of factors that employers should consider when evaluating whether any given employee is actually a variable hour employee.
  • The final rule clarifies when an offer of coverage made by a staffing firm will actually satisfy the client-employer’s obligation to offer coverage.

This article highlights the major components of the final rule and does not address all of the exceptions and special circumstances that apply. 

Published on February 12, 2014, in the Federal Register, the final rule updates a 2012 proposed rule interpreting section 4980H of the Internal Revenue Code, one of the central components of the Affordable Care Act (ACA). Under Code section 4980H, employers with 50 or more full-time equivalent employees in the preceding year—“applicable large employers” in ACA parlance—face two separate nondeductible penalties, one potentially very large and one smaller. The potentially large annualized penalty under subsection (a) is $2,000 times the number of full-time employees an employer had (generally minus the first 30, but for 2015 minus the first 80). The smaller annualized penalty under subsection (b) is $3,000 times the number of full-time employees who actually receive a premium tax credit, as described below.

The subsection (a) penalty is triggered if an employer: (i) fails to offer to “substantially all” (meaning 70% in 2015 and 95% in later years) of its full-time employees (and their dependent children) health coverage; (ii) at least one employee who was not offered employer coverage buys coverage through a health care marketplace or exchange,(iii) the employee qualifies for a premium tax credit through the exchange; and (iv) the employer is notified of such qualification. Even if an employer meets this “substantially all” coverage standard, the subsection (b) penalty is triggered if an employer: (i) fails to offer coverage that is “affordable” and that provided “minimum value” (as defined under a separate ACA rule); (ii) at least one full-time employee who was not offered such coverage buys coverage through a health care marketplace or exchange, (iii) the employee qualifies for a premium tax credit through the exchange; and (iv) the employer is notified of such qualification.

Ann Mackey’s recent blog post on the topic, “Small Employers Catch a Big Break!,” provides more details on the application of the final rule to small employers, including the delay for those with 50 to 99 full-time equivalent employees in the preceding year. Daniel Sulton’s recent blog post, “Employer ‘Pay or Play’ Mandate Final Regulations Issued—Major Impact on Educational Institutions,” offers specifics on the major implications for educational institutions under the final rule. Both articles can be found on Ogletree Deakins’ Employee Benefits blog.

Determining “Full-Time Employee” Status—An Overview

Understanding which workers are “employees” and which of those are full-time is critical. Only common-law employees are considered employees—meaning that (properly classified) independent contractors are excluded, as are leased employees, sole proprietors, and certain others. Full-time generally means that an employee averages 30 “hours of service” per week for a calendar month or 130 hours of service per month (though the final rule permits weekly counting, so 150 hours could be required some months). Generally, an hour of service means each hour for which an employee is paid, or entitled to payment, for either performing duties for the employer or for periods during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence.  Under the final rule, time worked as a bona fide volunteer for a government or tax-exempt entity does not count, nor does work under a federal or state or local work-study program. Service also does not count if the compensation for it is non-U.S. source income under federal tax rules.

Hours of Service. How hours of service are calculated depends on how employees are paid. For hourly employees, the calculation uses actual hours from records of hours worked and/or paid. For non-hourly employees, employers could use records of hours worked or paid or one of two equivalents: either 8 hours per day, or 40 hours per week, in which the employee is required to be credited with one hour of service. Under the final rule, different methods could be used for different plan years and categories of employees (i.e., collectively bargained and non-collectively bargained; different bargaining units; salaried and hourly; and employees primarily employed outside the United States) provided that the categories are reasonably and consistently applied.

Monthly Measurement Method. Employers can determine full-time status using either the monthly measurement method or the look-back measurement method. Month-by-month determinations are clearly contemplated in the ACA itself, though they could be difficult for large employers to administer in practice. Employers that use the monthly measurement method are not required to offer coverage to a newly eligible employee immediately upon his or her satisfying the 30-hour per week standard over a calendar month. Instead, the final rule clarifies that an employer would not be subject to the larger Code section 4980H(a) penalty if such an employee is offered coverage that is effective no later than the first of the calendar month following his or her first three full months of eligibility for coverage. (One practical impact of this is that employers can continue to use waiting periods, subject to other ACA rules, without the risk of incurring these penalties.) If the coverage offered was affordable and provided minimum value, the employer would also not face liability for the smaller Code section 4980H(b) penalty. Under the final rule, employers could use the monthly measurement method for certain groups of employees (such as salaried or collectively bargained employees) and the look-back measurement method described below for others.

Look-back Measurement Method. This method provides a more systematic approach to full-time status determinations. Employers evaluate which of their employees averaged 30 hours of service per week during a month in a prior period (a “standard measurement period”). Employers then treat these employees as full-time or not for a fixed period going forward (a “stability period”), regardless of how much the employees actually work during that period, provided they remain employed and pay any required premiums. Employees who were not with the employer at the start of that standard measurement period would initially be evaluated based on an “initial measurement period” pegged to their individual start date. Both types of measurement periods are 3 to 12 months long, and the stability periods 6 to 12 months long—though a stability period could not be shorter than a measurement period. Under this look-back measurement method, coverage need not be offered immediately after a standard measurement period. Instead, an employer has up to three months to determine full-time status, offer full-time employees coverage, and make the coverage effective for those who elect it. In the case of the initial measurement periods for individuals, a similar rule applies. In either case, these periods used to determine full-time status between measurement and stability periods are referred to as “administrative periods.”

Full-Time, Part-Time, Seasonal, or Variable Hour?

The following labels are important to apply properly to new hires and the final rule includes some useful details for employers evaluating their workforces.

  • Full-Time. As noted above, these are employees who average 30 or more hours of service per week during a month or during their initial measurement periods. It is important to be clear on the reasoning behind any determination that an employee is not full-time (but is rather part-time, seasonal, or variable hour). The final rule clarifies that the reasonableness of any determination will be based on the facts and circumstances as of the employee’s start date. Factors to consider include: whether the employee is replacing an employee who was (or was not) full-time; the extent to which weekly hours of service of employees in the same or comparable positions have varied above and below 30 during recent measurement periods; and whether the job was documented or communicated to the new hire as requiring hours of service that would average 30 (or more) per week. Special “non-assessment” periods built into the final rule appear to create incentives (reduced penalty risk) for employers to overclassify employees as full-time and offer them coverage.
  • Part-Time. These are new employees who are reasonably expected to average less than 30 hours of service per week during their initial measurement periods. The factors to consider are the same as those under the full-time employee status above.
  • Seasonal. These are employees in positions the nature of which is that employees typically work six months or less during a year and that the work begins at approximately the same time each year, such as winter or summer. Common examples include ski resort workers and holiday employees at department stores. The six-month limitation, which is new to the final rule, is important for employers in evaluating their workforces as it is clear that employers cannot simply characterize employees hired to work full-time for a project expected to last, for example, six to eight months as “seasonal” and not worry about offering coverage or paying penalties. (Note: “Seasonal worker” is a different defined term that only applies when determining whether a smaller employer actually hits the 50 full-time employee equivalent threshold to be covered by the shared responsibility rules.)
  • Variable Hour. These are employees for whom employers cannot determine whether they are reasonably expected to average at least 30 hours of service per week per calendar month during their initial measurement period because their hours are variable or otherwise uncertain. This determination is based on the facts and circumstances as of an employee’s start date. The distinction between full-time and variable hour can be critical for employers and the final rule again cites factors to consider: whether the employee is replacing an employee who was full-time or variable hour; the extent to which the hours of service of employees in the same or comparable positions have actually varied above and below an average of 30 hours of service per week during recent measurement periods; and whether the job was documented or communicated to the new employee as requiring hours of service that would average at least 30 per week. 

Importantly, the final rule clarifies that for purposes of determining whether an employee is a variable hour employee, the employer may not take into account the likelihood that the employee may terminate employment with the employer (or a related employer) before the end of the initial measurement period. Here again, an employer would not be safe in simply treating employees hired to work full-time for projects of, for example, six or eight months as “variable hour” and not worrying about offering coverage or paying penalties. As noted above, the final rule in some places seems to offer incentives (reduced penalty risk) to employers to over classify employees as full-time and offer them coverage.


Under Code section 4980H, employers are required to offer coverage to full-time employees and their dependent children (though not spouses). The final rule makes two clarifications regarding dependent children. First, it clarifies that stepchildren and foster children are not taken into account for the purposes of penalties under Code section 4980H. Second, the rules clarify that a dependent child is considered a dependent for the shared responsibility rules for the entire calendar month in which he or she turns 26.

Specific Jobs

Applying definitions such as full-time and variable hour has proven a challenge in certain fields such as commissioned sales, adjunct faculty at colleges and universities, and employees in various industries who are required to be on call or to be away from home overnight.

The IRS indicates that it is still considering additional rules for specific categories of employees. For now, though, employers are simply required to apply a reasonable standard. In the preamble to the final rule, the IRS indicates that it would be unreasonable to use a standard that takes into account only a portion of an employee’s hours of service with the effect of characterizing as non-full-time an employee in a position that traditionally involves more than 30 hours of service per week. The final rule does provide some guidance for specific jobs or types of pay that could help employers attempting to apply these rules:

  • Adjunct Faculty. The IRS provides a safe harbor for calculating the hours of adjunct faculty. Under this safe harbor, an employer would credit adjuncts with 2.25 hours of service for every hour of teaching or other classroom time and one hour for each non-teaching purpose he or she is required to work (for instance, attending required meetings or mandatory office hours). This safe harbor is available until the end of 2015.
  • Layover Hours. Employers of pilots, flight attendants, or other employees who have to remain overnight at locations other than their homes are required to use a reasonable method for determining service for those layover hours. It would not be reasonable, the preamble warns, for an employer to count layover hours for internal compensation purposes or toward required hours of service but not count them as hours of service for purposes of the full-time employee determination under the ACA.
  • On-Call Hours. Employers are also required to use a reasonable method for determining hours of service for employees who are directed to remain available for work. It would not be reasonable, the preamble warns, to fail to credit service for hours for which: payment is made by the employer; an employee has to remain on the employer’s premises; or the employee’s activities while on call are so restricted that the employee is prevented from using the time effectively for his or her own purposes.

In one area, the final rule is notable more for what it does not say about specific jobs than what it does say. The IRS had requested comments on special relief from the pay or play rules related to “short-term” employees (those hired full-time for certain limited periods of less than a year but not expected to be hired annually like seasonal employees would be) and employees in “high-turnover” positions (where some significant portion of employees would be expected to be employed for more than three months but not for their full initial measurement periods). Citing its concern about potential abuse of such rules, the IRS did not include specific provisions for either type of employee in the final rule.

Change in Employment Status

Changes in employment status such as moving between full- and part-time jobs can create some complications under the shared responsibility rule, and the final rule provides some useful clarifications.

Generally, if an employee who was employed at the start of a standard measurement period (an “ongoing employee”) experiences a change in status before the end of the related stability period, that change will not affect the employee’s treatment as either full-time or not full-time based on the prior measurement period.

The rule is somewhat more complicated when a new variable hour, seasonal, or part-time employee experiences a change in employment status before the end of his or her initial measurement period. If, in the new position, the employee would reasonably be expected to average 30 or more hours of service per week then the employer, to ensure that it would avoid penalties under Code section 4980H(a), would have to offer that newly full-time employee coverage effective no later than the first day of the fourth full calendar month after the change in employment status (assuming the employee is still employed). That offer would have to come sooner if the employee met the 30-hour standard during his or her initial measurement period and the related stability period would start sooner. If the coverage offered is affordable and provides minimum value, the employer would also be able to avoid the smaller penalties under Code section 4980H(b).

The final shared responsibility rule also provides guidance on how to handle situations where an employment status change results in different full-time status measurement methods being applied (for example, the former job was evaluated by the look-back measurement method, and the new job is evaluated by the monthly measurement method).

Related Employers

Although companies with common ownership are combined for purposes of determining whether the company meets the large employer threshold (and is thus covered by the shared responsibility rule at all), common ownership is disregarded for purposes of actually assessing a shared responsibility penalty. Whether a particular company owes a shared responsibility penalty and the amount of any payment are determined separately for each related company.  

Rehires (or Employees Resuming Services)

It is important for employers to know whether an employee who has left the organization for a period is to be treated as an ongoing employee (perhaps still subject to a “stability period”) or whether he or she can be treated as a new employee (potentially, a variable hour or other employee who would be subject to a new measurement period and would not have to be offered coverage immediately upon hire). This is true for employers using both the monthly measurement and look-back measurement methods.

Under the final rule, an employer may treat such an individual as a new employee only if the employee did not have an hour of service for the relevant employer for at least 13 consecutive weeks before the employee resumed providing services. This is a change from an earlier version of this rule, which used a 26-week standard. Note:  For educational institutions, the period must be at least 26 consecutive weeks.

An employer that uses the look-back measurement method to evaluate full-time status will have to take special steps not to penalize an employee who is not treated as a new employee for having taken what the rule calls “special unpaid leave,” meaning leave under the Family and Medical Leave Act or the Uniformed Services Employment and Reemployment Rights Act or for jury duty. An employer can either exclude the period of that leave when calculating hours of service or it can credit an employee who has taken special unpaid leave with the same hours of service during that leave period that he or she averaged for the rest of the measurement period. Note: Special service crediting rules apply to educational institutions.

Beyond the mechanics of evaluating “full-time” status, the final rule adds other important details about shared responsibility compliance.

Staffing Firms

Temporary staffing firms can raise interesting shared responsibility compliance questions. One question among employers has been whether an offer of coverage by a temporary staffing firm would be considered an offer of coverage by the client-employer itself for purposes of complying with Code section 4980H.

The IRS indicates in the preamble to the final rule that it is concerned about potential abuses involving staffing firms (for example, an employer and a staffing firm intentionally each hiring the same employee for 20 hours a week to perform the same job and both treating the employee as non-full-time).

The final rule does give employers some clarity in that an offer of coverage made on behalf of an employer (such as a Taft-Hartley plan) is counted as an offer of coverage by the employer. The final rule applies this same reasoning to staffing firms, with some limitations. In cases where the employee is not a common-law employee of the staffing firm, the offer would be treated as made by the client-employer, but only if the fee charged to the client-employer is higher than the fee that would be charged if that employee did not enroll in health coverage under the plan. This rule gives client-employers a roadmap to use, at least in some cases, to avoid Code section 4980H penalties.

Affordability Safe Harbors

As noted above, to avoid Code section 4980H(b) penalties, employers would have to offer at least one health coverage option that provided minimum value under ACA standards and also was “affordable.” Under the statute itself, affordable meant the employee share of the premium for employee-only coverage could not exceed 9.5% of an individual’s adjusted gross household income. Because employers would not know household income figures for their employees, employers were given three optional safe harbors to use to show their coverage is “affordable.”

The three safe harbors are based on 9.5% of: (i) an employee’s W-2 wages from the employer (reported in Box 1 of the Form W-2); (ii) a compensation figure based on the employee’s rate of pay at the beginning of the coverage period (or, for hourly employees, the lowest rate of pay during a calendar month); and (iii) the federal poverty line for a single individual in the relevant state for the relevant year. The rate of pay safe harbor is not available if the rate of pay for non-hourly employees is reduced. If an employer satisfies any of these three safe harbors, the relevant coverage option will be deemed affordable for purposes of Code section 4980H(b) penalty purposes, even if an employee is found to be eligible for a premium tax credit (meaning, in some cases, that the coverage his or her employer offered was not affordable under a separate standard applied by the exchanges).

The final rule provides additional details on these safe harbors, including clarifying that they can be applied to any reasonable category of employees, provided that it is done on a uniform and consistent basis for all employees in a category.