In Q&A format, recently issued Notice 2015-87 addresses a number of pressing issues that have arisen under the Affordable Care Act (ACA), including that law’s employer shared responsibility rules, information reporting requirements, and insurance market reforms, among others. Q&A 15 of the notice addresses, and proposes changes in, the rules governing breaks-in-service involving staffing firms that place contract and temporary workers with educational organizations. This post explains the proposed changes and examines their impact on staffing firms that provide employees to educational organizations.
Under the ACA’s employer shared responsibility rules, “applicable large employers” (generally employers with 50 full-time and full-time equivalent employees in the prior calendar year) have a choice: They can offer group health plan coverage to substantially all their full-time employees or face the prospect of a penalty. These rules are codified in Internal Revenue Code § 4980H and implemented in a final Treasury regulation.
The term “full-time employee” for purposes of the ACA employer shared responsibility rules means an individual employed on average at least 30 hours of service per week or 130 hours per month. Final regulations implementing these rules provide two alternative methods for determining an employee’s status as full-time: the monthly measurement method and the look-back measurement method.
- Under the monthly measurement method, an employee’s status as a full-time employee is determined by counting the employee’s hours of service for each month.
- Under the look-back measurement method, an employer may determine the status of an employee as a full-time employee during a future period (referred to as the stability period), based upon the hours of service of the employee in a prior period (referred to as the measurement period). The final regulations describe approaches that can be used for various circumstances, such as for employees who work variable hour schedules, seasonal employees, and employees of educational organizations.
Both methods for determining an employee’s status as full-time include break-in-service rules, the purpose of which is to ascertain an employee’s status as either a new employee or a “continuing employee” in cases where the employee experiences a period of absence and later resumes service. An employee who has a break in service of a prescribed length (discussed below) may be treated as a new hire. As such, the employer may, among other things, require the employee to satisfy a new waiting period before offering group health plan coverage without incurring a penalty. In contrast, an employee who terminates employment but does not break service is treated as a “continuing employee.” Upon his or her return, a continuing employee’s status as full-time is determined by including his or her pre-break service.
Generally, a break-in-service occurs where an employee accrues no hours of service for 13 consecutive weeks, but in the case of an educational organization, a break-in-service must be at least 26 consecutive weeks. (Alternatively, the educational organization can designate a shorter period of at least four weeks that exceeds the number of weeks of employment immediately preceding the period during which the employee was not credited with any hours of service. This rule is referred to as the “rule of parity”.) These rules apply to both the monthly measurement method and the look-back measurement method.
The look-back measurement method includes a separate, averaging rule that applies in the case of educational organizations. These rules, which effectively impute hours of service during academic break periods, require an educational organization to either:
- Determine an employee’s average hours of service by excluding any employment break period occurring during the measurement period and applying that average for the entire measurement period, or
- Credit hours of service for the employment break period at a rate equal to the average weekly hours of service for weeks that are not part of the employment break period.
The amount of hours imputed in any single calendar year is capped at 501 hours of service for all employment break periods occurring in the year.
Notice 2015-87, Q&A 15
Question 15 asks:
Is an employee who primarily performs services for one or more educational organizations but is not the employee of the educational organization(s) . . . subject to the special rehire rules [that apply to educational organizations] . . . and thus only treated as a new employee after a break of at least 26 consecutive weeks and, if the employer is using the lookback measurement method, subject to the special hours of service averaging rules?
In the answer, the Treasury and IRS report that they “intend to amend the regulations under § 4980H to address the application of the special rehire rules . . . to employees who primarily perform services for one or more educational organizations.” What the answer freely—though implicitly—acknowledges is that, under the current rules, the answer to the question is, “no.” That is, a contract or temporary employee of a staffing firm who is placed with an educational organization is not subject to the special rehire rules that apply to educational organizations. Rather, under current law, the general, 13-week rule applies and the averaging rules do not.
The regulators are clear about their reason for proposing to change the rule:
Treasury and IRS have been made aware that some educational organizations are attempting to avoid application of these rules by, for example, using a third-party staffing agency for certain individuals providing services. Because the staffing agency is not an educational organization subject to the special rule, the staffing agency could apply the lookback measurement method or the rules on new hires to treat some or all of these individuals as failing to be full-time employees or as new employees after a break in service of less than 26 weeks.
The answer to Q&A 15 announces that Treasury and IRS intend to propose amendments to the regulations under § 4980H “to provide for application of the special rule in certain circumstances in which the services are being provided to one or more educational organizations, even if the employer is not an educational organization.” Acknowledging that this is not the current rule, the answer also provides that the amendments contemplated by Q&A 15 will apply “as of the applicability date specified in the regulations, but in no event will the applicability date be earlier than the first plan year beginning after the date on which the proposed regulations are issued.”
In addition to telegraphing a change in the Code § 4980H break-in-service rules as they apply to educational organizations and the staffing firm with which they contract, the notice also raises the issue of which entity is the common law employer. The discussion leads off with the following statement:
“In some cases, the facts and circumstances may demonstrate that the staffing agency is not the common law employer of the individual for purposes of § 4980H, but rather that the individual remains the employee of the educational organization and the special lookback measurement rule and rehire rule would continue to apply.” (Emphasis added).
While the regulators raise the issue to advise that the proposed changes to the break-in-service rules will not depend on the identity of the common law employer, the italicized words clearly suggest that, contrary to the assertions made by some commentators, the Code § 4980H rules do not proceed from any presumption that staffing agencies are not common law employers. Indeed, the statement aligns well with the long-held view of the staffing industry and historical precedent that, in the vast majority of cases, the staffing firm is the common law employer of its contract and temporary employees that it assigns to perform services at client worksites. (For a comprehensive review of this issue, please see, Bianchi and Lenz, The Final Code §4980H Regulations; Common Law Employees; and Offers of Coverage by Unrelated Employers, Bloomberg/BNA Tax Management Memorandum (Sept. 8, 2014) available here.)
Impact on Staffing Firms
The changes announced in Notice 2015-87, Q&A 15 affect only staffing firms and other third-party vendors that provide workers to educational organizations. And even in the case of firms affected by the rule, the changes as applied to employees placed with educational organizations will be limited to the following:
- For staffing firms and other vendors that elect to determine full-time status of worksite employees under the monthly measurement method or the look-back measurement method, breaks-in-service will require 26 weeks without an hour-of-service rather than 13 weeks (the rule of parity will apply without change); and
- Staffing firms and other vendors that elect to determine full-time status of worksite employees under the look-back measurement method will be required to use the “averaging rule” for their employees, under which service will be effectively imputed during academic breaks, such as semester breaks and summer vacation.
While the proposed changes will not affect the initial determination of an employee’s status as variable hour, the need to impute additional hours under the averaging requirement could affect the determination of whether a variable hour employee is full-time. The following example illustrates the effect of the proposed rule:
Example: A is hired by staffing firm X on August 15, 2015. X has elected to apply the look-back measurement method. X determines that A is a variable hour employee as of her date of hire based on an application of the factors establish by the final regulations. A is placed as a substitute teacher in an educational organization. X applies a 12-month initial measurement period that begins on the first day of the month following date-of-hire (here September 1, 2015). A averages 150 hours per month from September 2015 to the following May 2016, and then takes June, July, and August off. Under the current rules, A has accrued 1,350 hours during her initial measurement period. As a result, A is not a full-time employee during the corresponding stability period. (X needs 1,560 hours to be treated as a full-time employee during the stability period that corresponds to X’s initial measurement period.) Under the proposed rule, however, X would need to impute 150 hours each month for June, July and August 2016. As a result A would, under the proposed rule, have 1,800 hours during her initial measurement period, which qualifies as full-time for the corresponding stability period.
As we noted above, this is not the rule yet. The Treasury Department and IRS plan to propose an amendment to the final employer shared responsibility rules to accomplish what they have in mind. Interested parties need not wait for the proposed change. The notice invites immediate comments on the proposal.