Under Section 4980H of the Code, an “applicable large employer” (i.e., an employer with 50 or more full-time employees, including full-time equivalent employees) will pay a penalty for any month if at least one of its full-time employees is certified as having enrolled for that month in a qualified health plan through an exchange for which premium or cost-sharing assistance is allowed or paid and either (1) the employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage but that coverage is not affordable or does not provide minimum value.

An employee is full time if he or she works an average of 30 or more hours per week.

Without administrative relief, the play-or-pay mandate would require employers to identify their full-time employees on a month-to-month basis. Under such a rule, employers with a significant number of hourly employees with irregular schedules (e.g., per diem employees) or seasonal employees (or both) would face significant administrative burdens.

In response to employer concerns, the IRS outlined an approach in Notice 2011-36 that would permit employers to determine full-time employees for any period, such as a plan year (referred to as a stability period), based on hours worked in some prior defined “look-back” period (referred to as a measurement period). Under this rule, if an employee is determined to be full time during the measurement period, the employee would be treated as full time during the subsequent stability period (e.g., the plan year) regardless of the employee’s work schedule during the stability period. If an employee was not full time during the measurement period, the employee would not need to be treated as full time during the stability period even if the employee was, in fact, full time during the stability period.

In Notice 2012-17, the IRS described a similar approach (i.e., involving the use of a look-back measurement period) for determining the full-time status of new employees if, based on all of the facts and circumstances, the employer cannot reasonably determine whether the new employee will work full-time because the employee’s hours are variable or otherwise uncertain.

Notice 2012-58 incorporates the concepts described in Notices 2011-36 and 2012-17 but modifies and expands them, permitting (but not requiring) employers to utilize a look-back measurement period for identifying full-time employees during a subsequent stability period.

The rules are flexible but somewhat complex and certainly novel in the context of health plan administration. A detailed summary of the rules is beyond the scope of this newsletter.

Consider the following example:

Acme Corp. maintains a health plan for full-time employees. The plan year is the calendar year. An employee is full time if he or she works an average of at least 30 hours per week. Acme has a significant number of per diem and part-time employees who work between 25 and 40 hours per week, depending on the availability of work. Acme chooses to use the safe harbor methods outlined in Notice 2012-58 and chooses the plan year as the stability period and the 12-month period ending on October 14 (which corresponds with the start of the open enrollment period) as the look-back measurement period. Between October 14 and the beginning of the plan year, Acme determines which employees worked full-time during the measurement period, notifies employees of their eligibility for the upcoming plan year, and performs other tasks associated with the annual open enrollment process. Based on Acme’s election, any employee who is determined to be full time during the measurement period will be treated as a full-time employee during the upcoming plan year for purposes of the play-or-pay mandate, regardless of the employee’s work schedule during the plan year. An employee who was not full time during the measurement period would not need to be treated as full time during the stability period even if the employee was, in fact, working full time during the plan year.