Starting in 2014, the Patient Protection and Affordable Care Act (PPACA) will impose shared responsibility penalties on large employers that fail to offer health coverage to all of their full-time employees (or offer health coverage to full-time employees that is deemed to be unaffordable or inadequate). IRS Notice 2012-58 provides a safe harbor for the identification of full-time employees for purposes of the shared responsibility penalties.
PPACA defines a full-time employee with respect to any month as an employee who works at least an average of 30 or more hours per week. Because monthly re-determinations of an employee’s status would be burdensome and could lead to frequent (and disruptive) changes in eligibility for health coverage, the IRS proposed a safe-harbor that allows full-time status to be determined on the basis of a retrospective measurement period of up to 12 months and applied during a prospective stability period.
Safe Harbor Applicable to Ongoing Employees
Standard measurement and stability periods
To determine whether ongoing employees are full-time employees, employers may use a safe harbor based on a standard measurement period and a stability period. An “on-going employee” is an employee who has been employed for at least one standard measurement period (a defined period of time chosen by the employer of between 3 and 12 consecutive calendar months). An ongoing employee's full-time status is determined by retroactively determining the average hours worked by the employee during the standard measurement period. An employer has the flexibility to determine when the standard measurement period starts and ends, as long as it is made on a uniform and consistent basis for all employees in the same category. For example, if an employer wants to use a 12 month standard measurement period, the employer could chose the calendar year, the plan year, or any other 12-month period, such as one that ends the month before the plan's annual open enrollment period. If the employee averages at least 30 hours per week during the standard measurement period, the employee is treated as a full-time employee during the subsequent stability period, so long as he or she remains an employee, without regard to the employee’s actual hours during the stability period.
The stability period is the length of time that coverage must be provided to an eligible employee who is determined to be full-time during the standard measuring period. For those employees who are determined to be full-time, the stability period must be at least 6 calendar months long, cannot be shorter in duration than the standard measurement period, and must begin after the standard measurement period (plus any applicable administrative period, discussed below). For those employees who are determined not to be full-time employees, the stability period cannot be longer than the standard measurement period. An employer may use measurement and stability periods that differ in length or have different starting/ending dates for the following categories of employees:
- collectively and non-collectively bargained employees;
- salaried and hourly employees;
- employees of different entities; and
- employees located in different states.
Optional administrative period
Because employers may need some time to notify and enroll employees who are determined to be full-time employees, the notice permits the employer to add an administrative period of up to 90 days between the standard measurement period and the associated stability period. However, to prevent any gaps in coverage, the administrative period must overlap with the prior stability period.
EXAMPLE: Employer selects a 12-month standard measurement period beginning October 15 and ending the following October 14, and a stability period based on the calendar year. Employer also selects an administrative period between October 15 and December 31 to determine which employees worked an average of 30 hours a week during the standard measurement period, to notify them of their eligibility and to enroll those employees who elect coverage.
Bob worked full-time during the standard measurement period beginning October 15, 2014 and ending October 14, 2015. Bob is an ongoing employee for the stability period that starts January 1, 2016 and must be offered coverage for the entire 2016 stability period, even if Bob ceases to work full-time during 2016.
Mary was previously determined to be a full-time employee and enrolled in the plan in prior years. However, during the standard measurement period beginning October 15, 2014 and ending October 14, 2015, Mary is determined not to be a full-time employee and is not required to be offered coverage for the associated stability period that starts January 1, 2016. However, Mary's coverage must continue through the end of 2015 stability period, including the administrative period October 15, 2015 to December 31, 2015.
Safe Harbor Applicable to Newly-Hired Employees
Newly-hired full time employees
If a newly-hired employee is reasonably expected to work an average of at least 30 hours a week, no penalties will be assessed if the employee is offered coverage not later than the 91st day after the start of the employee's employment. IRS Notice 2012-59, which provides guidance on the 90-day waiting period limitation of PPACA, is discussed in a separate Alert.
Newly-hired variable hour and seasonal employees
With respect to newly-hired variable hour and seasonal employees, employers may use a safe harbor to determine whether the new employee is a full-time employee based an initial measurement period of between 3 and 12 months. For those employees who worked an average of 30 hours per week during the initial measurement period, and are therefore determined to be full-time employees, the stability period must be the same length as the stability period applicable to ongoing employees. For those employees who are determined not to be full-time employees during the initial measurement period, the stability period will be the shorter of (a) the initial measurement period plus one month, or (b) the remainder of the standard measurement period that includes the last day of the employee's initial measurement period.
An employee is a variable hour employee if based on the facts and circumstances at the employee's start date, it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week over an initial measurement period. PPACA does not provide a definition of seasonal employee for this purpose, so at least through the end of 2014, an employer is permitted to use a reasonable, good faith interpretation of the term.
Transition rule from the newly-hired employee rules to on-going employee rules
The Notice provides rules to transition employees from the safe harbor for new employees to the safe harbor for on-going employees. These rules apply once a newly-hired employee has been employed for (i) an initial measurement period and (ii) an entire standard measurement period; in such case, the employee must be tested for full-time status beginning with that standard measurement period, in the same manner as other ongoing employees.
Under the transition rule, an employer using a 12-month measurement period will need to test employees for full-time status at least twice during a single 12 month period: at the end of the initial measurement period and again as of the end of the standard measurement period for on-going employees. Since those periods will often overlap, an employee may, due to changes in his or her work schedule, be determined to be a full-time employee in one measurement period but not the other:
- An employee who is determined to be a full-time employee during the initial measurement period must be treated as a full-time employee for the entire associated stability period, even if he or she is determined not to be a full-time employee during the overlapping or immediately following standard measurement period. In that case, the employee would be treated as not full-time only after the end of the stability period associated with the initial measurement period.
- In contrast, an employee who is determined not to be full-time during the initial measurement period, but who is full-time during the overlapping or immediately following standard measurement period must be treated as a full-time employee during the entire stability period corresponding to the standard measurement period, even if it begins before the end of the stability period associated with the initial measurement period.
Optional administrative period
Like with on-going employees, an employer is permitted to apply an administrative period before the start of the stability period. An administrative period may not exceed 90 days, taking into account both the period of time following the employee's start date before the beginning of the initial measurement period, and the period of time between the end of the initial measurement period and the date the employee is first offered coverage. In addition to the outside limits for the length of the initial measurement period (12 months) and the administrative period (90 days), the combination 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 (i.e., no longer than 13 months).
EXAMPLE: Employer uses a 12 month initial measurement period beginning on the date of hire of a new variable hour employee, a 12-month standard measurement period beginning October 15 and ending the following October 14, and an optional administrative period not to exceed 90 days. John, a variable hour employee, is hired May 10, 2014.
If John averages 30 hours per week during 12-month initial measurement period (May 10, 2014 - May 9, 2015), John’s employer must offer coverage starting not later than July 1, 2015, assuming John is still employed on that date.
If John does not average 30 hours per week during the 12-month initial measurement period (May 10, 2014 - May 9, 2015), John’s employer does not have to offer him coverage. However, John’s status must be re-determined based on John’s hours in the standard measurement period (October 15, 2014 - October 14, 2015). Then, if John averages 30 hours per week during the 12-month standard measurement period (October 15, 2014 - October 14, 2015), John’s employer must offer coverage within a standard administrative period not in excess of 90 days (i.e., no later than January 12, 2016), assuming John is still employed on that date. Of course, John’s employer would probably pick a standard administrative period of 79 days so that John’s coverage could start on January 1, 2016.
Employers may rely on the guidance provided in Notice 2012-58 at least through 2014, and will not be required to comply with any subsequent guidance that is more restrictive until January 1, 2015. The Notice clarifies that the reliance covers a measurement period that begins in 2014, and the associated stability period which may extend past January 1, 2015. The Notice requests comments on several issues, including whether safe-harbor rules are needed for temporary or other short-term employees, whether special rules are needed for mergers and acquisitions, and how seasonal workers should be defined.