Last week we examined the reporting challenges associated with employee terminations, changes in status, and breaks in service under the monthly measurement method. As we explained, “[t]he final regulations under Code § 4980H establish two—and only two—methods for determining an employee’s status as full-time: the monthly measurement method and the look-back measurement method.” This week, we turn our attention to selected issues involving terminations, changes in status, and breaks in service under the look-back measurement method.
Under the look-back measurement method an employee’s status is determined based first on whether he or she is newly hired or has been employed for some time (an “ongoing employee”). In the case of new hires, employees are further classified as full-time, part-time, seasonal or variable hour. The status of a newly hired part-time, seasonal or variable hour employee is determined based on a measurement period of up to 12 months commencing with the date of hire or the first day of the month following the date of hire, during which coverage need not be offered and no penalties are imposed. Where the newly hired employee qualifies as full-time during the measurement period, he or she must be offered coverage during a corresponding stability period (irrespective of hours worked, provided the employee is still employed). A similar approach applies to ongoing employees, except that the measurement and stability period are fixed in advance. Newly hired full-time employees are treated much the same way as they would be treated under the monthly measurement method, i.e., the determination of full-time status is made month-by-month. (The particulars of the look-back measurement method are explained here.)
Obtaining the information elicited by Part II of Form 1095-C (Lines 14, 15 and 16) is particularly challenging since the required data is unique to each employee and the reporting is done month-by-month. (Click here for the reasons why.) Part II furnishes the IRS with information relating to the administration of three separate provisions of the Internal Revenue Code, i.e., Code § 5000A (the individual mandate), Code § 36B (eligibility for premium subsidies), and Code § 4980H(b) (the second of the two layers of penalties under the employer shared responsibility rules).
- Line 14 solicits information about what coverage the employer actually There are, of course, instances in which the failure to offer coverage in a month does not result in any exposure, e.g., the failure to offer coverage during a waiting period. Line 14 is agnostic on this score.
- Line 15 asks for the “Employee Share of Lowest Cost Monthly Premium, for Self-Only Minimum Value Coverage.” This enables the IRS to determine whether coverage is affordable.
- Line 16 asks the employer to explain why it might not have exposure under Code § 4980H(b). The employer establishes this to be the case by providing the appropriate “Applicable Section 4980H Safe Harbor” code, if applicable. Where Line 16 is left blank, the employer will incur a penalty under Code § 4980H(b) for the month if the employee has qualified for a premium subsidy from a public insurance exchange or marketplace.
The Basics of Reporting
The look-back measurement method is particularly useful in the case of employees with irregular or intermittent work schedules. Where an employee is determined to be part-time, seasonal or variable hour as of his or her date of hire, the employer incurs no Code § 4980H penalties despite failing to make an offer of group health plan coverage. The employee in this instance is not treated as a full-time employee during his or her initial measurement period. As a consequence, where an employee’s initial measurement period does not end in the calendar year of hire, the employer does not provide a Form 1095-C to the employee for the year. The employee in this instance is in a limited non-assessment period. According to the final 2015 Instructions for Forms 1094-C and 1095-C (the “instructions”), “[F]or purposes of reporting on Forms 1094-C and 1095-C, an employee in a Limited Non-Assessment Period is not considered a full-time employee during that period.”
Once a newly hired employee completes his or her initial measurement period, then the employer must make an offer of coverage for the corresponding stability period irrespective of actual hours if the employee worked on average 30 or more hours per week during the initial measurement period.
NOTE: While the consequences of failing to offer coverage during a stability period to an employee who has qualified as full-time are not specified in any formal guidance, representatives of the Treasury Department and IRS, in non-binding, off-the-record comments, have asserted that the benefit of the look-back measurement method is retroactively unavailable with respect to affected employees, thereby requiring an amended Form 1094-C and 1095-C for the prior year. In addition, depending on the facts-and-circumstances, there might be penalties for filing an inaccurate Form. (For a discussion of penalties, please our previous post on the subject.)
During the stability period, the proper 1-series indicator code for Form 1095-C, Part II, Line 14 would be the code that would otherwise apply to any other full-time employee, even in a month in which the employee does not work full-time hours. Line 15 would reflect “the amount of the employee share of the lowest-cost monthly premium for self-only minimum essential coverage providing minimum value that is offered to the employee.” If the employee accepted coverage, the proper 2-series indicator code for Form 1095-C, Part II, Line 16 would be 2C (Employee enrolled in coverage offered). If the employee declined coverage, and assuming that the coverage provided minimum value and was offered to the employee and his or her dependents, the proper 2-series indicator code would be the applicable affordability safe harbor code (if the coverage is affordable) or Line 16 would be left blank (if the coverage was not affordable). The employer would follow a similar approach to ongoing employees who have qualified for coverage in the stability period that follows and corresponds to the preceding standard measurement period.
Of course, it is always possible that the employer might be more generous than required and make an offer of coverage to a part-time, seasonal or variable hour employee during his or her initial measurement period. If the employee, who is not a full-time employee during any month of the year, accepts the coverage, the reporting depends on whether the coverage is fully-insured or self-funded.
- If the coverage is fully-insured, then no Form 1095-C is required. (The carrier will provide the Form 1095-B to this employee.)
- If the coverage is self-funded, then the proper 1-series code is 1G (Offer of coverage to employee who was not a full-time employee for any month of the calendar year. . . and who enrolled in self-insured coverage for one or more months of the calendar year). Line 15 and 16 would be left blank.
An employee in an initial measurement period for all months of employment during a calendar year will not receive a Form 1095-C, so his or her termination will have no effect on reporting. An employee whose employment terminates during a stability period with respect to which he or she previously qualified for coverage need no longer be offered coverage. From and after the month in which termination occurs, Line 14 would be coded 1H (No offer of coverage), Line 15 would be left blank, and Line 16 would be coded 2A (Employee not employed during the month). If the termination takes place mid-month, then the 2-series code in the month of termination would be 2B (Employee not a full-time employee). As a result of a change made in the instructions, it matters not whether the employee elected COBRA.
Changes in status
The final regulations under Code § 4980H provide a special rule in the case of an employee who is initially classified as part-time, seasonal or variable hour and who transfers to a full-time position during his or her initial measurement period. Under this special rule, the employer will not be subject to an assessable payment for the period before the first day of the fourth full calendar month following the change in employment status or, if earlier, the date on which coverage would have been provided had there been no change and the employee otherwise qualified for an offer of coverage. For example, assume that Employee A was hired by Employer X on January 1 as a variable hour employee and transferred to full-time on July 1, and worked full-time for the balance of the year. A is offered and accepts Employer X’s offer of minimum essential coverage commencing October 1 (following the appropriate waiting period). Employer X’s group health plan coverage provides minimum value, imposes a 90-day waiting period, and it is offered to the employee and the employee’s spouse and dependents.
For January through September, Line 14 would be coded 1H (No offer of coverage); Line 15 would be left blank; and Line 16 would be coded 2D (Employee in a Section 4980H(b) Limited Non-Assessment Period). For October, November and December, Line 14 would be coded 1E (Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse); Line 15 would report the amount of the employee share of the lowest-cost monthly premium for self-only minimum essential coverage providing minimum value; and Line 16 would be coded 2C (Employee enrolled in coverage offered).
Breaks in service
Under both the monthly measurement method and the look-back measurement method, an employer is permitted, but not required, to treat an employee who is rehired after incurring a “break-in-service” as a new employee if the employee was not credited with an hour of service for at least 13 consecutive weeks. For educational institutions, a break must be at least 26 weeks. Under an alternative “rule of parity,” a break in service is deemed to occur for periods shorter than 13 consecutive weeks if the employee was not credited with an hour of service for a period of at least four consecutive weeks, and that period is longer than the employee’s previous period of employment. The break in service rules apply solely for the purpose of determining whether an individual should be treated as a continuing or new employee. They have no bearing on whether the employee is a full-time employee.
Although the break-in-service rules that apply under the look-back measurement method are generally the same as those that apply to the monthly measurement method, there is an important difference. The break-in-service rules that apply under the look-back measurement method include service-spanning rules that apply to unpaid leaves. The monthly measurement method tests full-time status month-by-month, including months when no hours are being accrued (regardless of the reason for the non-accrual).
The reporting consequences of the service-spanning rules might best be illustrated by an example: Employee B is an ongoing employee of Employer Y. B qualified for, and enrolled in, coverage under Y’s group health plan based on the immediately preceding standard measurement period. Y’s group health plan is affordable based on the W-2 safe harbor, and it provides minimum value. Coverage is offered to the employee, spouse and dependents. On May 1, B goes out on FMLA leave for three months (May, June and July). B stays out for another 2 months (August and September), returning to full-time employment on October 1. Employee B retains coverage under Y’s group health plan while on FMLA leave, drops coverage on August 1 and resumes coverage November 1. Because of the rules governing unpaid leaves of absence, B’s break in service is only 8 weeks (August and September). For coding purposes, January through April would be coded 1E (Line 14)/2C (Line 16) and Line 15 would be completed. The same is true for the period of FMLA leave, i.e., May, June and July, and for November and December. For August and September, Line 14 would be coded 1H (No offer or coverage), Line 15 would be left blank, and Line 16 would be coded 2A (Employee not employed during the month). And for October, Line 14 would be coded 1H (No offer or coverage), Line 15 would be left blank, and Line 16 would be coded 2D (Employee in a section 4980H(b) Limited Non-Assessment Period). (The coding for October reflects the requirement that applies absent a break-in-service that coverage must be offered by the first day of the month following the rehire date.)
(Limited) Special Rule for Re-Hires
The final Code § 4980H regulations include a special rule that is useful in situations in which an employee retires and transfers to part-time, either immediately or following a brief hiatus. Under the rule, an employer using the look-back measurement method is permitted to apply the monthly measurement method to that employee beginning on the first day of the fourth full calendar month following the change in employment status. This rule applies, however, only where the employer originally offered coverage as of the first day of the calendar month following the employee’s initial three full calendar months of employment and continuously thereafter.
By way of example: Employee C has worked for Employer Z for 20 years, and plans to retire January 1. Employer Z, needing C’s services for an unspecified transition period, asks C to instead transfer to part-time. C agrees. Employer Z has elected to apply the look-back measurement method to determine full-time status, under which C has previously qualified for an offer of coverage. To entice C to accept, Z offers to subsidize C’s first three months of family coverage such that C pays the same rate that is charged to active employees. Beginning April 1, Z determines C’s status as full-time under the monthly measurement method, despite that C is in a stability period with respect to which C would otherwise be treated as full-time. Employer Z’s group health plan is affordable based on the W-2 safe harbor, and it provides minimum value.
The coding consequences would be as follows: For January, February and March, Form 1095-C, Part II, Line 14 is coded 1E (Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse). (C’s COBRA rights under Employer’s Z’s group health plan qualify as an offer of coverage.) Line 15 provides the amount of the employee share of the lowest-cost monthly premium for self-only minimum essential coverage providing minimum value that is offered to the employee—which would reflect the subsidy. If C accepts coverage, then Line 16 would be coded 2C (Employee enrolled in coverage offered) and if C declines coverage, the proper 2-series code would be 2F (Section 4980H affordability Form W-2 safe harbor).
Under the above-described special rule, Employer Z is free to determine Employee C’s status as full-time from April through December under the monthly measurement method. If C remains on COBRA for the balance of the year, Line 14 would continue to be coded 1E, Line 15 would reflect the full cost of the COBRA premium for self-only coverage, and Line 16 would continue to be coded 2C. If C terminated the COBRA coverage for the balance of the year, Line 14 would still be coded 1E and Line 15 would again reflect the unsubsidized self-only COBRA rate. But Line 16 would be coded 2B (Employee not a full-time employee).